Above is a long term monthly chart of the S&P 500 Index going back to 1995. With all the recent volatility and news, it is sometimes helpful to take a big picture look at the market. When markets move lower and volatility increases, it often takes a period of time for the market to "adjust" to new price levels before moving into a long-term uptrend again.
Notice the red and blue price lines right below the monthly chart of the S&P 500. These lines basically measure average prices over a rolling period of time, in this case monthly. The red line measures a shorter term average price and the blue line a longer term average price. The newest monthly price is added and the oldest monthly price is dropped from each average each month. These lines essentially show us if prices are moving higher on average or lower on average over a long period of time. When the red line (shorter term average) crosses the blue line (longer term average) to the downside, prices are moving lower on average and vice versa when the red line crosses up through the blue line.
When the red line crossed the blue line in 2003 (which was accompanied by institutional accumulation), the trend in the market changed and a long-term upward trend developed. Currently both the red and blue lines are still moving lower, so the long-term average price of the index is moving lower, despite the recent 20% rally in the index. If the recent 20% rally also corresponded with a red to blue crossover, as it did in 2003, we could assume the average price on a long term basis was beginning to move up and it would likely mean a change in trend in the markets.
Based on the current readings, it will likely take several more months of stable prices or base building in the index before the red and blue lines begin to stop moving down and then begin to curl upward as they did in 2003. While we can try to anticipate a change in trend, the markets can change direction on a dime in the short term. Remember, the downside in the markets last year erased the previous five years of gains. This doesn't mean the market can't move higher and it may continue to do so. However, from a risk/reward standpoint, it's better to wait to become more aggressive when the long term risk/reward setup is in our favor. Once the average price lines begin to flatten out and stop going down, we can begin to look more favorably at the markets.
