Thursday, November 8, 2007

Thoughts for Thursday, November 8...

There was some rather volatile price action on the S&P 500 today. The market declined throughout most of the morning, and reached a low of 1451.01 around 1:15 in the afternoon. From that point, the index began an almost thirty point rally to reach a late day high of 1479.45, before settling down into a closing price of 1474.21.


I recount all of this because it illustrates the recurrent importance of a particular source of support for the S&P 500. I refer to the 50-week Simple Moving Average, which is illustrated on the chart below. If you look back as far as 2004, you can see that this price level has provided an excellent source of support for at least five sell-offs. It is not as though the markets turn on a dime when they hit this moving average, but the S&P 500 has yet to penetrate more than two or three percent below it (with the one exception of August 16, 2007).




I mention this point today, because the 50-week moving average of the S&P 500 Index currently lies at 1471.66. This means that today's trading saw about a one and one-half percent penetration of this moving average before rallying to close above it. In case you are wondering, a three percent penetration of the 50-week simple moving average at its current levels would take the S&P 500 down to around 1427.55. A penetration as severe as the one seen on August 16 would take the S&P 500 to 1405.08. My point being that we do find ourselves testing some very significant, time-tested support. At the same time, it would not be out of the question to see a fifty to seventy-five point penetration of this moving average before the markets finally turn up.

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