S&P 500 Trading Where the Air is Rare | ETF Trends

By David Fajardo, SVP Marketing and Chief Content Officer for Direxion

Should traders be long, or beware?

The question all traders are asking is: Can the longest – and most hated- bull market in history continue to run?

For technical traders looking for entry and exit points, 50 and 200-day moving averages is just one, albeit, simplified approach. That said, it is worth noting that the S&P 500® is currently in rare air as it trades 3.12% above its 50-day moving average and 9.74% above its 200-day moving average even after lackluster performance this week. In fact, the recent range of the 200-day is the highest since January 2018 prior to the event immortalized by ‘Volmageddon’ on February 5 of that year.

This has been picked up by some in the trading community as an ominous sign even as equity and futures positioning looks a lot different today.

The S&P 500® is Trading Well above its Moving Averages

Source: Bloomberg Finance, L.P., as of January 24, 2020. Past performance is not indicative of future results. One cannot invest directly in an index.

Seeing the S&P trade that far above support lines may indeed indicate that a pullback is due, but a 3-year picture does not tell us much about the true opportunities for additional gains or, on the flipside, a sell-off.

Be that as it may, we looked at data back to the late 1920s in order to gauge how rare this air may actually be. As expected, we confirmed that the S&P is trading well above its 200-day moving average and the average of its moving average based on an extremely long time period.

The S&P 500® Bull May Have Room to Run

Source: Bloomberg Finance, L.P., as of January 24, 2020. Past performance is not indicative of future results. One cannot invest directly in an index.

This chart shows that the index does not need to fall back to those levels anytime soon and can continue at these levels for some time as witnessed for multiple month periods. It is also worth noting that the S&P had not seen a day of greater than plus or minus 1% in over 70 days until Monday, January 27.

Few Ever See the Big One Coming.

There are many traders and investors who will tell you that they saw the last big drawdown coming.  The old saw about economists who called 10 of the last 5 recessions is a decade- old joke.

While there is no guarantee that this calm will continue as the Coronavirus outbreak in China could steamroll, do not simply rely on the fact that the market trading above moving averages to hunker for a selloff, but be prepared for the possibility that the next one could be sizable. It could also be short-lived given the considerably easy financial conditions in the U.S. and around the globe.

As a trader, whether you think you should be long, or beware, you can only win if you get the direction right.  Trade boldly.

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