I typically use channels and the 40/120 Front Weighted moving averages to determine the overall market trend in the S & P 500 using the weekly timeframe. Starting with the moving averages.... Earlier this year we had the short term trend, 40, cross the 120 down, and in range like fashion, such cross was the low of the year. Now, 40 tried to cross 120 again but to the upside to resume the old uptrend, except it failed miserably on the cross another range like action and once again, a year extreme, the year high; reason why I was bearish this week before BREXIT results (as posted in ES Journal thread). Examing the channels On the chart there is a well defined range like downsloping channel and current price action depicts clearly breakout failure, an intention of price remaining trapped inside this ranged like structure. Conclusion? Whether its a range or the beginning of a reversal (downtrend) we are bearish, because if it is a range we are at the top of such and a downtrend by definition is obviously bearish. Bottomline, combining what the trend examination shows and the bearish seasonality tha typically begins in June and lasts til Sept/Oct I would be cautious with long positions. Price is absolute and it's telling us it wants to remain inside in this large range and unless it escapes it to the upside, I see no value in predicting otherwise. Judging from current events, there is nothing but air below if this range is to hold. For the time being I would be shorting rallies and covering during panic, unless price is at the bottom of the range or outside it's upper resistance area.
Yes, it's in a large range, and going long at 2,100 was fool's gold, even if the Wall Street pundits kept touting a 2,300 end of year target. The S&P cannot seem to break 2,134 and the risk/reward favors the downside move. A breach of 2,000 on a close will increase negative sentiment and the "air" below is a clean break until the 1,800 level is tested again. If THAT breaks, then the 1,575 all time prior high of 2007 is likely to be tested. It would imply a 25% correction from the 2,100 area, which is historically less than the average bear market corrective pattern of 35%.
Although I may agree with your analysis I think using a simple MA crossover method will lead to lots of whipsaws because it's a lagging indicator. It would take several weeks to prove whether this is a massive consolidation reaching for new all time highs or if this were a bearish triple top as several have alluded too. You can not discount the fact that there may be a blow off top that breaks the upper channel in an attempt to inflict the most pain by triggering stops on shorts and catching those last few late bulls and even those that catch early breakouts. So, I usually take small positions in these instances and remain mostly in cash until it shakes out. I also would recommend looking at shorter time frames to catch that momentum sooner than a 40 week MA will give you. Just my 0.02
You did not understand a thing I wrote then, when the crossover "lies", you in a range. Hence the "whipsaws".
I understood exactly what you wrote. I was trying to explain that crossovers and moving averages are usually poor indicators of market direction, up, down, or sideways. Markets will consolidate in a range perhaps for long periods after a strong bull run. You say the crossover "lies" because you would expect a crossover to the upside to "resume the old uptrend, but it failed miserably". You also said you use the moving averages to "determine market direction". But using this method resulted in you concluding we are possibly in a range or bear trend reversal. Did this method take you from 8-2015 the first big drop in price until mid 2-2016 (nearly 6 months) to figure this out? Is that 6 months really a tradeable time frame to be wrong or inconclusive on market direction? That 6 month interval is how long it took for the 40 to flatten and cross the 120 and THEN see PRICE reverse the directional move to the downside the indicator was trying to give you. At that point it would tell you ,....nope it's a range because price reversed up. Also, the stronger the trend the slower this crossover method will give a change in direction because these MA will be farther apart to begin with. My points were trying to be CONSTRUCTIVE and point out there are other methods to determine market direction. I guess next time I'll refrain from constructive input.