Exchange traded funds indexed to the S&P 500 are back for another test of the 200-day moving average after the key support level held in June. Will the indicator again provide a floor for stocks following the recent pullback?
“In other words, we’re in the ‘danger zone’ for this widely-followed measure of accumulation versus distribution for stocks,” wrote Joshua Brown at The Reformed Broker. “Bear in mind that many financial pros use this 200-day (or ten month) moving average as a proxy for whether or not they want to be heavily in equities.”
He was referring to the 200-day simple moving average rather than the exponential.
If the indicator is breached, it could trigger more selling by investors and advisors who use the 200-day moving average as a stop to protect against further losses. [Stock ETFs Hold the Line Despite Bearish Headwinds]
Small-cap ETFs find themselves in a similar position.
The iShares Russell 2000 (NYSEArca: IWM) found support at its 200-day exponential moving average on Friday and the low from that session was not revisited in Monday’s weak tape, said Tarquin Coe, technical analyst at Investors Intelligence.
The decline in the small-cap ETF “was less severe than that of the S&P 500 and hence the small cap fund is outperforming today,” Coe wrote in a newsletter Monday. “On a relative basis the IWM is turning up from a support shelf against the SPY. This relative strength from the small caps, which are higher risk, is macro positive in what is on the surface a pretty awful start to the week.”