When moving averages kiss…

Will Wall Street move into Uptrend and give us a new ‘bull’ market? Has it aready done so?  We have commented previously that the UK’s FTSE 250 has, surprisingly, tended to lead the way – upwards – for the major UK and US market indices. We have also suggested that investors should not get too ‘carried away’ with the prospect of a full recovery and a new ‘bull’ market on either side of the Atlantic; accordingly that  any new involvement into the markets should be restrained and take cognisance of the possibilty of a sudden and sharp reversal.

One of the interesting signals of a major change in trend has been a cross over of the 13 and 34 week exponential moving averages (‘MAs’). The US markets, epitomised here by the S&P 500, have not yet provided this trend change-over signal -

(Click on Chart to enlarge)

So, although the major Downtrend may be over (at least for the time being) a ‘bull’ market Uptrend is not yet in play.

And the same scene applies to the UK’s  FTSE 100 index -

(Click on chart to enlarge)

But the wider UK index, the FTSE 250 has, in comparative terms, been roaring away and its two MAs are now at ‘kiss’ point as they cross over and provide the signal for a possible change in trend and the prospect of higher stock prices to come. And hinting that the US and other UK indices should follow suit and move further upwards from their tentative lift off their extreme lows.

But wait, not only do we need much heavier technical signal evidence of a change in trend than just the crossover of these two MAs but also the crossover of the MAs itself can be questionable and provide a false signal:

Repeating the FTSE 250 chart above we have now added the ‘false’ crossover that occurred in March 2002 after the market had hit bottom in Sept. 2001 at 4650  and which encouraged investors to pile into the market only for them to get nastily burned by the subsequent reversal and collapse down to the final low at 3780 in March 2003- after the subsequent the ‘bear’ crossover in June 2002 (marked with the red arrow)

(Click on chart to enlarge)

And therein lies the danger. All the market indices have been moving up and, in so doing, hav created a ‘V’ bottom formation. But, as 2002/03 shows this may not yet be the final low. Even if the 666 low on the S&P 500 in March 2009 does turn out to be the final low there is always the (quite strong) possibilty that this level may be tested for a second time. It is not uncommon for a seriously fragile market to put in a ‘W’ shaped bottom formation. So far we have the first ‘V’, we may yet see the second. If the S&P’s two MAs do not manage to kiss and crossover then a ‘W’ bottom formation becomes a real possibilty.

So, take care and keep your market involvement low and manageable until the MAs have kissed and a definite trend change is confirmed by all our technical signals.