It ‘should’ be higher but it isn’t … ?

Bespoke is on my RSS list, there are a few articles to read each day, which I do. I like their focus on data rather than opinion or hyperbole. This particular post, from Saturday, caught my eye, it looks at where the S&P500, and various sectors, are in relation to their 50 day moving average. Pretty simple stuff, a big picture view using a reasonable benchmark:

As shown in the chart of the S&P 500 as a whole, the index currently sits right at the bottom of the green shading, which is two standard deviations below its 50-day. Last Monday, the index was four standard deviations below its 50-day, which was something that didn’t even happen at any point during the ’08/’09 financial crisis.

The bounce from 4 standard deviations below to two standard deviations below was very quick. I must say though that the moves in the index since then have been unimpressive (for a bull). This week there have been three distinct attempts at 1200, each one has seen the ES drop back to 1180, or thereabouts. My concern is, as a mean-reversion sort of guy, that for an index 2 standard deviations below a longish-term MA the attempts at going up are not being sustained.

There are a number of points upon which this view can be attacked, and fair enough too.
-The fact is that despite getting rejected at 1200 or so and falling, the falls are limited to 1180, whereupon there is support.
-What is so significant about a 50 day MA? Why is being below that of any importance? Again, fair enough. The 50 day MA is a widely used measure and may have some sort of self-referential, self-fulfilling quality … some sort of psychological value. That’s a pretty weak argument, IMO, but its about the best I can come with.
-What is so significant about being 2 standard deviations below? Another good objection. Two standard deviations is significant in statistics, for all sorts of reasons that can be researched, but 2 std deviations is not magical by any means, and really, not overly extreme either. And also, I will be the first one to argue that applying the normal distribution to price plots is not necessarily meaningful. The prevalence of long-tails in financial markets are evidence that the normal distribution just doesn’t apply. On the other hand, it works a lot of the time so I will use it to help me (this sounds like a cop out and it may well be).

So, yeah, if you don’t like my view that the price behaviour here is of concern, I would find it difficult to fault your view. But I’ll stick with my view (until the price/volume/time behaviour tells me to change it, which might be the market finding support above that 1180 area, for example) to help me with my trading.

Here is a 2 x 1 Point and Figure chart of the ES showing the recent moves, followed by the same chart with me changing the scales to better support my argument (watch out for people who do this):

2 x 1 Point and Figure chart of the ES

Exactly the same chart, different horizontal scale

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