The Line That Keeps Showing Up on So Many Charts By Van Tharp Trading Institute
Six years ago, I covered the origin story of the saying “Draw a line in the sand”. As I’ve been doing my normal chart scans over the past couple of weeks, I’ve been struck by how often a “line in the sand” keeps showing up.
The line that I’m seeing is the 200-day simple moving average (SMA). I’d like to revisit this very interesting and useful idea from a couple of perspectives:
- Why certain indicators seem to be more important than others.
- Revisiting the S&P 500 chart we looked at last July.
- And look at a few charts where the 200-day SMA may be of significant importance to traders and investors today.
The “Line in the Sand” Charts From Last July
Very few people would be surprised that the S&P 500 Index broke below its 200-day moving average in January of 2022:
Despite trying to pop back up in late March (dead “market” bounce?) the S&P 500 kept moving below this key moving average until it was below the 200-day SMA by a huge amount in June:
I said last July that such an extreme move down was likely to be followed by an extreme move up. And that’s what we got, right into the middle of August:
The break above the 200 SMA has held so far for over six weeks…
But much like a physical line drawn in the sand using a stick, the 200-day moving average is just a mental construct, a relatively arbitrary calculation drawn on the chart. What, then, makes it so useful? I will answer that question with one word.
Eyeballs.
Loads and tons of eyeballs are watching this line. As I’ve reviewed with you in past articles, when lots of people are looking at an indicator, it becomes an important reaction area, almost like a self-fulfilling prophesy as price approaches it from either direction.
And I see that over and over again in my chart scans right now. We see it not only in the S&P 500, but in all the major U.S. indexes.
The 200 SMA has held so far in the New Year for the beaten-up Nasdaq:
And we see the Small Cap Stocks that had another nice January Effect this year, outperforming the Large Caps since mid-December:
And the Dow Jones Industrial Average, which has held strong since November:
Wednesday morning, before the Market opened, I saw the beating that Intel (INTC) has taken through the lens of the 200 SMA:
Which lead me to look at one of rivals, Advanced Micro Devices (AMD):
There are lots of eyeballs on these key areas across lots of stocks and indexes. The “line in the sand” isn’t magic. It’s just well-watched. I’m keeping my eye on it at these key reaction levels.
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