The Line in the Sand (That’s Now a Long Way Away) By Van Tharp Trading Institute
Well before the Covid pandemic, and even before there was much of a trade war between the U.S. and China, I wrote about the concept of drawing a “Line in the Sand” as it related to a simple moving average in the S&P 500 that just wouldn’t be broken for many years in a row. Today, I’d like to revisit this very interesting and useful idea from a couple of different perspectives:
- The Origin of drawing a line in the sand.
- Then, revisiting my example from the S&P 500, looking at why that particular line in the sand may again be of significant importance to traders and investors.
The “Line in the Sand” Origin Story
A potentially explosive standoff played out in the sands of northern Egypt some 2200 years ago. Chronologically, our story occurs smack dab in the middle of the 323-year period between the death of Alexander the Great and the birth of Jesus Christ.
As we tune in, an invading force in Egypt (at that time a Roman protectorate) is being presented with a “leave or suffer the consequences” ultimatum signed by none other than the Roman Senate.
Some historical figures seem to be on the wrong side at every possible turn. In this retelling, an ancient and ill-remembered king is going to give us some trading wisdom long before there were trading exchanges. And as a bonus, he’ll give us the cool origin for a phrase that will be familiar to everyone reading this.
Antiochus IV Epiphanes, the sovereign of the Seleucid Empire (modern day Iran, Iraq, Syria and parts of central Asia) made a pre-emptive attack on Ptolemaic Egypt, which had recently demanded a return by the Seleucids of previously captured lands.
Let’s get the players straight.
After the death of Alexander the Great some 150 years earlier, the power void was filled by four of his generals who would, after intrigue and wars aplenty, turn Alexander’s conquered lands into four kingdoms. Two of those former kingdoms would become the Seleucid Empire ruled by this article’s central figure, Antiochus IV, and Egypt, ruled by the Ptolemaic dynasty.
In 170 B.C., Antiochus captured all the major Egyptian cities except the capital city of Alexandria. He left behind a puppet government in a futile attempt to avoid the wrath of Egypt’s protector—Rome.
But in 168, Antiochus could not leave well enough alone and returned to finish the job of conquering Egypt. Meeting little resistance, he and his army crossed the river Eleusis. This was the last natural barrier separating them from their goal of Alexandria—a mere four miles out. It was there that were met by Rome’s envoy, Gaius Popilius Laenas. He did not have an army with him – just a demand signed by the Roman Senate that Antiochus withdraw or be considered at war with the Roman Empire.
Antiochus moved first and held out his hand as a friendly greeting to the elder statesman from Rome. Instead of receiving a handshake in return, the Roman historian, Livy, records what happened next:
Popilius, however (instead), placed in his hand the tablets on which was written the decree of the senate and told him first of all to read it. After reading it through, he said he would call his friends into council and consider what he ought to do. Popilius, stern and imperious as ever, drew a circle around the king with the stick he was carrying and said, “Before you step out of that circle give me a reply to lay before the senate.” For a few moments he hesitated, astounded at such a peremptory order, and at last replied, “I will do what the senate thinks right.” Not till then did Popilius extend his hand to the king as to a friend and ally.
So, we have the first ever recorded event of someone “drawing a line in sand”. It’s a phrase that means a boundary or limit to what one will accept. Popilius’ line, if crossed, meant a declaration of war.
The U.S. stock market has time and again, done the same for us, though the battle is between the bulls and the bears. The market has shown us that its “line in the sand” is now important because of how far away it is, rather than just as a boundary line.
The Simple 200-Day Moving Average is Still Giving Useful Information
Very few people would be surprised that the S&P 500 Index broke below its 200-day moving average in January of this year. Despite trying to pop back up in late March, it has been below this key moving average almost all year.
Much like Popilius’ demarcation drawn using his walking 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 can answer that question with one word.
Eyeballs.
Loads and tons of eyeballs are watching this line. As I’ve told you in past articles: When lots of people are looking at an indicator, it becomes an important reaction area, almost like a self-fulfilling prophecy.
But before we look at what useful information this longer-term chart is telling us, let me give some quick comfort to those of you who might be thinking, “But D.R., price has dropped below and popped above the 200-day moving average a few times without much fanfare. How can you say that it’s a true ‘line in the sand’?”
One of the key lessons I had to learn in applying technical analysis (and even more importantly in quantitative analysis) is that indicators are not discrete points on the chart. They are zones or levels that we pay attention to.
Bear in mind that the prices on the chart are determined at a moment-by-moment auction. Market prices are not just the combined psychology of all market participants at any given moment. As we all know, psychology is far from an exact science. So, our tools need to match the flexibility needed to understand that underlying psychology.
And what market psychology is the simple 200-Day MA telling us now?
It is telling us that price has wandered very far from this well-watched “line in the sand:
What happens when we get such a big separation between price and the 200 SMA? They are ripe for reversion toward the mean, and we may already be getting that rebound.
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