Exponential moving averages will dictate if uptrend remains valid

Published Sun, Oct 8, 2017 · 09:50 PM

WITH the 10th anniversary of the Great Financial Crisis just ahead of us, the US equity market still appears firm and steady as it continues to set new record highs. Current economic growth puts us in the third longest growth in history since 1933 at 99 months, implying a late stage economic cycle. To put the economic growth cycle in context, the housing boom period of 2000 had an economic boom of only 73 months while the longest economic expansion growth came from the 1990s decade with 119 months. This is not to say that a major downturn will happen in the days to come but it's good to know where we are in the current economic cycle. At the end of each economic expansion cycle comes a recession where the market tends to enter into a severe prolonged correction.

Looking at the price action of the S&P 500 index, the current uptrend remains unshakeable even against the backdrop of rising geopolitical tensions in Korea. The market only sprang to life after November 2016 with the unexpected Trump presidency victory being the catalyst, taking out the 2016 high of 2,193 points. Since then, the S&P 500 index trended higher steadily without a correction greater than 3.5 per cent and the year to date gain of the S&P 500 index is 14 per cent.

There seems to be a clear pattern to time the reversal of the market dips since 2017. The 20-day exponential moving average (EMA) and 60-day EMA acted perfectly as a springboard on every retracement shown by the highlighted areas where the uptrend takes back control. For example, the six-week correction from March 1 was halted impeccably off the 60-day EMA one month later in April, moving the S&P 500 index back into the uptrend. The EMA shows the average of prices over a defined number of time periods with greater weight placed on the recent prices.

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