The famous phrase “to draw a line in the sand” comes from the siege of the Alamo in 1836. It refers to the actions of William B. Travis, the lieutenant colonel, and commander in charge of the Alamo. He contemplated surrender on this fateful day but decided to draw a line in the sand, and those who wanted to defend the Alamo stepped across.
A line in the sand has developed in the financial markets as the 2-month stock market rally nears its fateful day. The 10-week and 30-week moving averages remain informative technical indicators. The outcome of the test of the 10-wk and 30-wk moving averages can help to decide the sustainability of the current rally and the future primary trend.
Moving averages are lagging indicators since the prices trail the underlining price. However, they are most helpful when filtering the noise in the marketplace and forecasting directional changes in the primary trend.
The 10-week and 30-week simple moving averages are often deployed for intermediate-term buy and sell signals. If the price breaks above the moving averages, it hints at buying opportunities. However, the official buy signal occurs when the moving average trends higher, reaffirming the buy decision.
On the other hand, if the price breaks below the moving average, it warns of a selling situation. The final sell signal occurs when the moving average trends down. The rolling over of the moving average reaffirms the selling decision.
Because moving averages have lagging tendencies, they are not precise and will not predict the exact market tops and bottoms. They are most effective when identifying trend changes before they happen.
Key stock market indexes are currently testing their respective 30-week moving averages. There are two possible outcomes:
Under scenario 1 - The ability of key stock market indexes to convincingly break out above their respective 30-week moving averages hints at the potential for trend reversals - from the existing primary downtrends (from Nov 2021 or Jan 2022 all-time highs) toward primary uptrends (new record highs).
Under scenario 2 - The failure to convincingly clear above their respective 30-week moving averages and the rolling over of the 30-wk moving averages warn the next market sell-offs. Under this scenario, the 10-wk moving averages act as pivotal support or the “line in the sand” defense for the bulls to defend the market.
One final point worth mentioning about moving averages. It takes time to confirm primary trend changes. Upon confirmation, the new trend tends to sustain for a long time.
Like an ocean liner, once the ship turns, it would take a herculean effort to reverse the direction.
It may take several more weeks to confirm the next primary trend. It would imply the next month or so is crucial.
Interestingly, the timeframe coincides with the historical seasonality weakness period from September to October and ahead of the November mid-term elections.