Earlier this week I provided some basics on technical analysis and made note of the recent and frequent testing of the 1380 support level of the S&P 500. What happens now that the support has broken and the market has closed below this level?
To clarify, technical traders actually referred to this 1380 support as a "200-day moving average"for the S&P 500 index but the same caution holds: Now that the S&P has closed below the 1380 mark, it signals a bearish sentiment among the investor crowd and points to more downward movement in stock prices. But does technical analysis work every time?
Mark Hulbert at MarketWatch.com offers logical and historical perspective on the meaning of the 200-day average, and says the technical indicator "owes its impressive track record to the earlier decades of the last century" but it hasn't been so reliable in the past 20 years or so. Hulbert goes on to explain:
Since 1990.... my hypothetical moving-average portfolio made just 3.6% annualized, compared to 7.0% annualized for buying and holding. Are the last two decades a fluke? The academic researchers with whom I have spoken about the matter aren't aware of any reason why it would be. On the contrary, they think it is entirely plausible that the 200-day moving average stopped working because of its increasing popularity -- which effectively killed the egg-laying goose.
In other words, the break below 1380 for the S&P 500 may prove to be the beginning of a new bear market; however, so many traders are aware of it, a negative move from this level may simply be brief, self-fulfilling prophecy coinciding with fears of a fiscal cliff coming in 2013 and renewed uncertainty over Europe. Any positive news on those issues could create a positive bounce for stocks.
For most long-term investors (and some proponents of fundamental analysis) you will still maintain a solid portfolio of mutual funds and invest for our objectives rather than by the whims of the crowd.