Como se combate o populismo? "Com eleições", responde Fukuyama

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When a Cross Isn't a Cross
By Helene Meisler
RealMoney.com Contributor


So all that negative sentiment brought about a rally. Of course, it was a rally on light volume once again, which seems to the mark of all the recent rallies.

As if that weren't enough, the put/call ratio dropped like a stone! All the put/call ratios haven't been this low since the big rally on June 29. People are anxious to believe in this rally like they were then.

That puts us in a conundrum. As I mentioned Monday morning, the 10-day moving average of the put/call ratio is about to peak and head down, which tends to coincide with some sort of rally in the market. Yet the one-day reading says we shouldn't trust the rally. My take on this conflict is that this is a bear market and rallies will be short-lived.

That doesn't mean we can't get some follow-through; after all, we are heading into the end of the month, when we typically see mark-ups. But if we do see follow-though on any rally, it will peter out by early August. Some of you might recall that a few weeks ago, when I first discussed the possibility of a rally starting last week, I believed it could last until early August, and that time frame hasn't changed.

I have received countless emails in the past week or so asking about the 50- and 200-day moving averages and the "crossover," or "death cross," or whatever it's being called. I have never used this as an indicator, so I cannot vouch for its usefulness.

I do know that the Japanese, who are credited with being the first to use technical analysis (they applied it to rice trading in the 17th century or thereabouts) typically use 5- and 25-day (or week) moving averages. The rule is that when the two moving averages are heading in the same direction and one crosses the other, you get either a golden cross (buy signal) or a black cross (sell signal).

This is key: Both moving averages must be heading in the same direction.

The S&P 500's 50- and 200-day moving averages we have the 50-day MA moving down and the 200-day MA still rising. Because the moving averages aren't headed in the same direction, any crossing signal isn't valid under the Japanese rule.

In addition, 200 days ago was early October 2005, when the S&P was trading around 1200. It's currently at 1260, so it's easy to see it would take a decline to at least 1200 before we can even get the 200-day MA to turn downward to make this cross significant.

The chart shows that the S&P didn't even get to that 1260 area until early December 2005. Because we're using a moving average and dropping the data from 200 days ago as we head forward, the S&P now must plunge below 1200 to get the long-term moving average to roll over, or the S&P must hang around 1260 for at least another two months before the 200-day moving average starts declining.

I'm sure those folks who are discussing this particular indicator must have a different set of rules governing their signal, because as best as I can tell, there is no signal at present.