The 200-Week Moving Average Is The Only Technical Indicator I’m Watching Right Now

| September 30, 2011 | 0 Comments

At this point, investors are scared out of their minds.  And for good reason…

As you know, the global economy is now in a cyclical slowdown.  The US is heading for another recession.  And the world’s manufacturer, China, is slowing much faster than anyone expected.

What’s more, Europe’s battling a debt crisis.

Greece seems like it’s doomed to default on some of its debts.  And the problems are in danger of spreading to Italy, Spain, Portugal, and Ireland.

If European leaders don’t find a solution soon, we could see a sovereign debt crisis so severe we’ll be wishing for the good ol’ days of the 2008 financial crisis.

Not surprisingly, stocks are down and volatility is up.

The S&P 500 is down about 15% since July 7th.  And the VIX, a measure of volatility, is up more than 140%!

Clearly, investors are afraid and bearish on stocks right now.

Now, one technical indicator I’m following could put the final nail in the stock markets’ coffin… and officially send us into a new bear market.

You see, the S&P 500 is in danger of falling below its 200-week moving average. 

Consider this…

From March 2001 to July 2002, the S&P 500 went on to fall another gut wrenching 30% from 1,150 to 800.  And from June 2008 to March 2009, the large cap index fell an eye-popping 45% from 1,270 to 666.

As you can see, the 200-week moving average is a key technical support zone.  If this level doesn’t hold… the S&P 500 is likely to fall another 30% to 45%.  That would knock another 340 to 500 points off the S&P 500.

Here’s what you need to do…

If the S&P 500 closes below the 200-week moving average at 1,144 this week, it’s a big red flag.  But it’s not the death knell for stocks.  You’ll need to keep a close eye on the index next week too.

If it stays below the 200-week moving average for an entire week, it’s a good bet we’re in a new bear market.

But don’t jump the gun… If the S&P 500 can rally above 1,144 next week, there’s still hope we’ll avoid falling into a bear market.

Here’s the bottom line…

The S&P 500 has only fallen below its 200-week moving average twice in the last twenty years.  And both times the S&P 500 declined more than 30% in vicious bear markets.

Obviously, bear market downtrends are bad for stocks.  But they’re great for option investors.

You see, option investors can profit from downtrends just as easily as they can from uptrends.  That means option investors aren’t afraid of the coming bear market.

In fact, I’m getting ready to make a killing as stocks fall through the floor.  And subscribers to Elite Option Trader are too… 

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Category: Technical Analysis

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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