- Identify key $SPX risk levels using the 200-day moving average.
- Recognize negative momentum divergences and what they may signal.
- Use volatility bands to prepare for a potential breakout or breakdown.
Happy Hump Day! It’s already day-3 of this week’s installment of the CMT’s Market Mosaic, and I want to look at the S&P500 in a few different ways today, all while outlining some defined areas for risk management purposes.
First, one of the best things about corrections that take place over time is that many risk management tools tend to “catch up” when the markets get choppy, which is exactly what we’re seeing with the long-term, 200-day moving average in the blue, shaded area below.
At the time of this writing, the 200MA is only 3.4% below the pattern lows, and as the legendary Paul Tudor Jones once said, “Nothing good happens below the 200 day moving average.”
Point being, while the 50-day moving average is relatively flat as the market whips around it, if the S&P500 starts to roll over, there’s a pretty clear line in the sand here that could be used for a hard stop to sit back, relax, and trade another day.
That being said, while the market has, in fact, chopped sideways, it’s done so with a slightly positive bias.
Meanwhile, momentum (in the lower pane) has been diverging negatively against this price movement in the S&P500… action that we technicians take as a “hint” of potentially bad things to come.
Now, the important word to emphasize here is “potentially,” as markets don’t always fall due to negative momentum divergences. The market can (instead) correct through time and fall sightly, or simply go through a period of higher volatility, short-term spikes and troughs (which is largely what we’ve seen so far).
One other thing I’d like to point out is that the lows in the RSI(14) momentum indicator have struggled to fall below 40, which is a line-in-the-sand used by many market technicians to discern how strong the bull market happens to be.
Said another way, holding above 30 is bullish, but holding above 40 is even better.
The purpose of a chart like this is to both measure volatility, and to analyze how far to the extremes the market is trading in the short-term.
You can see how, during the Tariff Crash, not only did those extremes start to widen - they also crossed decisively below the lower -3% moving average, indicating potential wash-out in the short-term.
Right now, a base is being built, and the breakout (or breakdown) from this base is going to happen eventually, and as time goes on, the more it coils, the bigger the break.
Or… as Louise Yamada, another legendary portfolio manager and technician often says, “The bigger the base, the higher in space.”
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