How To Trade The 200-Day Moving Average | Podcast Episode #19

0:00
Hey, everybody. This is Ryan Mallory from shareplanner.com doing another podcast episode with you all. I spent a lot of time, and, and a lot of this is because of the current market conditions that we’re trading in, but I’ve spent a lot of time talking about the 200 day moving average.

0:17
If you go to my YouTube channel, which is youtube.com/shareplanner, I’ve talked a lot about the 200 day moving average there. I’ve probably done 2 or 3 videos. In the past week or two talking about it. And now this is a podcast that I’m going to focus primarily on the 200 day moving average.

0:36
And the reason for that is because the market for the large part of 2018 has dealt solely with the 200 day moving average. So with the S&P 500, we tested it back in February of 2018 this year here, and then we touched it again.

0:58
In late March. Then we touched it again in early April, mid-April, and now in early May, and. The one thing that held true about each test of the 200 day moving average was the fact that we bounced hard and bounced fast.

1:18
Now, There were with each of these, we, we pushed below the 200 day moving average with each instance. But the one recurring theme was we quickly recovered and there was only one instance where we actually closed below the 200 day moving average.

1:36
All the other instances were merely intraday moves below the 200 day moving average. And even that one instance where we closed below the 200 day moving average, we saw the market gap up the following day and make a good run higher. So, and that also led to a multi-week rally for the stocks, so.

1:56
Now here this, this podcast episode. Being done in early May, May 4th. This is a Opportunity that we’re seeing it yet again of the S&P touching the 200 day moving average, and then bouncing really hard to the upside.

2:13
And so, The one thing that you have to remember with the S&P 500 or any index for that instance. When it comes to testing the 200 day moving average is that you just don’t blindly buy off of the 200 day moving average because it can test it, it can go below it.

2:33
And it can go much further below it than you would even expect. So you take some of these days that we had in the S&P 500, for instance, on April 2nd, you had the S&P 500 really push way below where it was trading at at the 200 day moving average.

2:51
So it broke the 200 day moving average at 2590 and it goes all the way down to 2555. Now, if you’re just buying blindly off of the 200 day moving average, you’re getting such a horrible entry price on any stock or ETF that you’re buying.

3:07
Because you’re not waiting for there to be some kind of a base or some kind of a bounce off of the moving average, and a lot of times. When the S&P initially tested the 200 day moving average, it just blew right through it, and it didn’t even act like it was there, and it wasn’t until the afternoon came about where buyers started buying up the market and pushing it back above the 200 day moving average that that we actually saw a strong reaction to, to that moving average, so.

3:39
You don’t want to buy blindly off the 200 day moving average. You want to wait for there to be a base to develop, for there to be some activity. You don’t want to just simply say, OK, we’re at the 200 day moving average, let’s go ahead and buy. Buying blindly is never a good suggestion for the stock market, because when you’re buying blindly, what you’re really trying to say is, is that I want to get at the, I want to get in at the very bottom.

4:04
I’m going to buy at the lowest point, and you’re fooling yourself to really think that you have the ability to get in at the very bottom. On a consistent basis, you’re really just guessing and guessing in a way that isn’t long term beneficial for your trading account.

4:21
Um, and the reason why I say you can’t do it is not because. You as a traitor cannot do it. Specifically, what I’m trying to say is that nobody can do it, OK? Nobody has the ability to know when exactly the market’s going to bottom.

4:38
If you have a couple billion dollars that you’re going to throw at the market or on the S&P 500, OK, yeah, maybe you can go ahead and create a bottom, you know, but you’re creating that bottom and you’re working against yourself. I don’t have $2 billion and there’s really hardly anybody that does.

4:56
So, it’s really irrelevant for this discussion. So, When it comes to trading, you need to be waiting for the market to tell you, OK, this is a good time to be getting along on the market. This is a good time to be Working that 200 day moving average with the new, cause oftentimes what happens is that I actually start seeing the buying power flow in when the market is below the 200 day moving average and I start buying stocks before it’s even gone back above it, but based off of the price. that you’re seeing on the 5-minute and the 30 day or the 30-minute charts of the S&P 500, you can tell that there’s enough momentum gathering that it’s probably going to go ahead and recapture the 200 day moving average.

5:40
So, I’m actually getting in lower. Then I would be had I just bought blindly on the 200 day moving average, so. The other, the other important concept, and we haven’t seen this yet with this market, but it does concern me is the frequency.

5:58
That we’re testing the 200 day moving average. It bothers me when we consistently. Keep testing it. And the reason why is, it’s that it’s like if you, uh, take a quarter, or you take like a little pebble and you start, you know, hitting a, a, a glass window, OK, 1st 2345 times, it might not break, but you keep doing it repetitively over and over and over again.

6:22
Eventually, that glass is going to weaken, you’re probably gonna break it or you’re going to hit it hard enough by accident one time where it breaks it. And that’s kind of what I’m worried about right now with the S&P 500, is that we have tested it so many times. For today alone, this is the 9th time that we’ve tested the 200 day moving average, and all 9 times we have ultimately held it and Even now, we’re, we’re bouncing really hard off of that 200 day moving average, but it scares me because, uh, you know, if we keep testing it, odds are that it’s eventually going to break because of just like the glass window example I gave you, moving averages are not meant to be repetitively tested over and over and over and over again in a very short period of time, and to hold it each time, eventually, it creates a breakdown.

7:09
And with the S&P 500 right now, Yes, we are bouncing off the 200 day moving average, but we’re not creating any technical improvements on the chart. So, where we had the, the January all-time highs established and then that huge steep sell-off thereafter, OK, we ended up bouncing off the 200 day moving average.

7:30
And we bounced for almost like a solid month before we saw any kind of weakness come back into the market, but we didn’t break those January highs unless you were the NASDAQ. The NASDAQ did, but the S&P 500, which is what I mainly focus on, did not.

7:47
In fact, it created a noticeable lower high in the market. And when it came back down in April and tested it, it bounced again, but it didn’t break the highs from March. So again, we have another lower high, and so the question becomes now with this bouncing.

8:04
Again, off of the 200, are we going to break the April highs, which would be a huge deal if we did, or are we going to come back down and test the 200? Because I have a very low level of confidence that if we come back and test the 200 day moving average again, we may not hold it again.

8:22
And uh So, and the other, the other. concept that I want to go over is shorting the stock market. Um, there’s been some really steep sell-offs intraday and on, and on the day as a whole, all throughout this year, there’s been days where we’ve seen the Dow drop over 1000 points and seen the S&P drop over 100.

8:44
Intraday we’ve seen moves over 1600 on the Dow. So there’s big moves to be had and so when we start seeing some of these breakdowns, we want to get short on them, but what you have to be very careful is is getting short on this market while we are still trading right above the 200 day moving average.

9:01
So just because the daily chart may be suggesting, OK, the market’s rolling over, we haven’t broken that 200 yet. And we’ve seen time and time again, 9 times in fact, where the S&P holds it each time. So, do you want to take the chance that on the 10th time it’s going to break?

9:17
Maybe it does, and maybe it just really tanks down hard and we start seeing a, a major rollover and a, and a break of the February lows, but maybe So far we have not seen that happen. And so you don’t want to, just like you don’t want to assume that, OK, we’re testing a 200 day moving average.

9:34
I’m gonna go ahead and just buy blindly here. No, you can’t do that. You have to get some kind of confirmation because what you don’t want to do is, is buy. An ETF like a 2X inverse ETF or just short the S&P 500.

9:51
And then get caught in a short squeeze because we bounced again off the 200. So the best thing to do is to wait for a close below the 200 day moving average and then for the follow through. And then you have to be on your, you have to be on your toes with, with the trade because it’s very possible that even if we break below the 200 day moving average like what we saw on April 2nd, the next day we’re, or the day after we’re going to bounce very hard.

10:14
So you have to be willing to be wrong. You have to be willing to cover your short position quickly if the trade doesn’t work out like you expected it to. So this, this was a good. Podcast, I think, for us to go through about the 200 day moving average.

10:46
Up until February, it’s been a very, very long time since we even had a discussion about the 200 because it was just such way, it was so below current price action that it had become quite irrelevant to uh any kind of market discussions, but now it’s back in play and people are talking about it again.

11:05
There’s a lot of support there. So, when we finally do break it someday in the future, it’s going to create a lot of hoopla and probably induce another wave of fear and trembling in the stock market and But, uh, until then, be careful, don’t go blindly buy off the 200 day moving average, wait for some patterns to develop.

11:05
Don’t go shorting right above the 200 day moving average. Be careful, be nimble, and I’m sure you’ll do just fine.