Key Moving Averages | Battles at 50 and 200 SMAs
The next few weeks will have very important battles for the markets at the 50 and 200 simple moving averages (SMAs) for the S&P 500. Sunday night’s newsletter forecasted a move down early this week on the S&P 500 to test its 50 SMA near 1,339.
Unfortunately for the bulls, that pullback did happen and the S&P 500 tested a low of 1,333 today. There was a bounce late in the day to finish just above the 50 SMA at 1,341 and right at the 20 SMA trendline. Staying above the 1,340 level is important to keep the uptrend rally going from early June.
Breaking back down below the 50 SMA and staying there could spell even more trouble heading into August. The market fall in 2010 in August was bad and last year it was huge at 15.7% to its low in the first week. The fall in 2011 was a strong technical breakdown that cascaded quickly once the 200 SMA was broken.
That is why MR continues to warn investors about a breakdown below that key level. When the technicals and fundamentals line up on a breakdown below the 200 SMA, it can lead to very deep and fast selloffs. It will be critical to stay above 1,300 in the next few months to avoid another repeat from last Summer.
Minutes of the Fed’s June meeting were released today which showed their concern that the struggling U.S. economy could worsen. This was specially noted if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year.
The Fed also expressed worries that Europe’s debt crisis will hamper US growth. However, Bernanke told reporters after the meeting that he was open to another round of bond purchases if the job market does not improve.
If the market does not bounce up off the 50 SMA later this week as we predicted, then a retest of the 200 SMA support next week is very likely near 1,310. That will also probably rule out another attack at 1,400 for the Summer.
The last 5 weeks have created the big ups and downs that MR was warning about for the Summer. Before making any more power stock picks, we will wait to see how the battle at the 50 SMA goes to end the week. Look for more investor longs Sunday night if the market firms and holds the 1,341 level and short sell picks if it heads back down to the 200 SMA.
Investors need to get ready to lighten up more on equities and risk if the market does head back down to the 200 SMA tomorrow and Friday. You don’t want to take weekend risk on Europe if the market is close to breaking down below it.
MR recommends investors continue to remain cautious and lighter on riskier equities until after the longer term financial situation in Europe has more clarity. The short term is neutral to negative but with the potential for a higher move in earnings season. However, the 200 SMA is getting close so be ready to make some sells if necessary.
Gold and silver have not shown the strength MR anticipated in June and July. At this point silver needs to hold its final support at $27/oz or it could see a big drop. Gold’s key support area is $1,550/oz before creating increased selling. Precious metal investors need to be on watch to avoid a big fall and to free up cash to buy a big selloff if one comes. Both gold and silver are still great long term investments, but pain may be coming if buying doesn’t come very soon.
The caution alert for retirement accounts and investors is still present and will remain for the foreseeable future.
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