Hold your nose and buy.
It doesn’t happen often. But, whenever the major market indexes decline towards their 200 day moving averages during a bull market, it pays to be a buyer of stocks.
Look at these long-term charts of SPY and QQQ – the exchange-traded funds for the S&P 500 and Nasdaq 100…
Since the current bull market started in early 2023, SPY has tested the support of its 200-day moving average (MA) on two previous occasions.
QQQ has tested the 200-day MA three times.
Each test was successful. Each test led to an immediate rally. And, each test ultimately proved to be an excellent buying opportunity for investors.
Granted, it is difficult to be a buyer of stocks when it appears that the markets are falling apart. As we’ve seen time and again, though, that is often the best time to buy.
The caveat here is that the tests of the 200-day MA are only successful in a bull market. At the start of a bear market – like in early 2022 – the indexes sliced right through their 200-day moving average lines, and are sharply lower months later.
The Risk/Reward Setup…
Of course, we can only know if a test of the 200-day MA is successful in hindsight, after the fact. There’s no way to know ahead of time.
So, there is some risk to buying stocks right here.
The saving grace, however, is stocks don’t go down (or up) in a straight line. Technical conditions are often quite oversold by the time the indexes test their 200-day MAs.
Even if the test fails, the indexes are set up for an oversold bounce back towards their 200-day moving averages – if only to relieve the oversold conditions before turning lower again.
For example, consider what happened in early 2022, at the start of that bear market. Investors who bought SPY at $425, or QQQ at $360 as they tested their 200-day MAs, suffered initially as the indexes lost support.
But, it didn’t take long before the indexes put on an oversold bounce – where investors could have exited the trades near breakeven before a more significant decline took hold.
Both SPY and QQQ closed Monday near their 200-day moving averages. If we’re still in a bull market, then this will prove to be an outstanding time to buy stocks.
On the other hand, if we’re at the start of a bear market, then investors who buy right here might have to endure some short-term pain before they get an oversold bounce that allows them to exit the trades at near breakeven.
In other words, the risk/reward setup to buying into the current conditions is excellent.
Best regards and good trading,
Jeff Clark
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Source: Jeff Clark Trader