Moving averages remain a popular technical indicator, helping investors and traders uncover dominant trends. However, selecting the correct time frame can be challenging. Also, having the patience and discipline to wait for confirmation of the signals is equally demanding. Moving averages tend to work because many traders and investors use the same moving averages, resulting in a self-fulfilling prophecy.
So, what is the best moving average for very long-term investing?
Many investors utilize the 200-day moving average as a longer-term moving average indicator. Similarly, investors deploy the 50-day ma for intermediate-term trends. The 10-day and 30-day moving averages are best for shorter-term trend identifications.
The longer-term moving averages are more reliable trend indicators than the intermediate-to-shorter-term moving averages because they filter out more noise and fluctuations in price, at least from a statistical perspective.
The press and media quote the 200-day ma and 50-day moving averages, and many traders and investors use and act on their signals. Because of this, the price action of the technical indicators can influence the direction of the index or market through the self-fulling prophecy.
The monthly charts may be best for longer-term trends, including structural (i.e., 8 – 20 years) and generational trends (35 – 42 years). The 10-month and 40-month moving averages may offer investors the best moving average timeframes for longer-term investors.
Why? The press and media are loosely aware of its significance, suggesting the self-fulfilling prophecy is not an issue. The moving average is not too fast to produce false signals and not too slow to miss the buy and sell signals.
Since the 1920s, the 40-mo ma has been a reliable moving average indicator that has successfully called almost all structural bull and bear trends in the SPX Index (SPX). A violation of the 40-mo ma and the rolling over (down trending) of the 40-mo moving average confirm structural bear/trading range markets (i.e., 1966-1982 and 2000-2013, etc.). However, rebounding from its 40-month ma has led to the resumption of the structural bull markets (i.e., 1982-2000 and 2013-present).
During the 2022 cyclical bear decline, SPX has slipped briefly below the 30-mo and 40-mo ma (currently at 4,078 and 3,833.5). However, the recovery from Oct 2022 low and the 2023 sharp rally has resulted in SPX trading 4.66% above the 40-month ma and -1.64% below the 30-month ma.
It may be too early to determine if the brief violations of the 30-mo and 40-mo moving averages last year warns of a structural trend change. Only time will tell. Nonetheless, with both long-term moving averages still trending up, this hints at the 2022 market selloff as a cyclical bear operating within the May 2013 structural bull.
One interesting point worth mentioning - the 2022 market downturn closely resembles the Oct 1987 crash. During the 1987 selloff, SPX plummeted from a high of 329.80 to a low of 230.30 or -30.17%. During the recent 2022 decline, SPX fell -27.54%. In the process, SPX briefly violated the 30-month and 40-month moving averages but recovered above the two critical long-term moving averages, allowing for the resumption of the 1982-2000 structural bull.
Will an extensive trading range develop between 3,200-3,500 and 4,800-5,000 alleviate the overbought condition from the explosive 2000-2022 rally, allowing for the resumption of the May 2013 structural bull?
Another interesting point is that although a death cross-sells signal has developed in Oct 2022 (10-mo ma crossed below the 30-mo ma), SPX is trading +1.60% above the 10-month ma and -1.64% below the 30-mo ma. The death cross-sell signal confirms the 2022 cyclical bear decline. However, the ability of the 10-mo ma (3,947) to maintain above the 40-mo ma (3,933.5) hints at the continuation of the structural bull trend. Since the spread (113.37) between the two moving averages continues to contract, it would imply another inflection is likely this year, possibly during the second half of the year.
Enclosed are monthly analyses of the SPX Index and the corresponding 10-month, 30-month, and 40-month moving averages, the % Distance of SPX from the 30-month, 40-month, and 10-mo moving average indicators.
Monthly moving averages take a long time to develop. Like an ocean liner, once it turns, it is likely to sustain for many years or decades. The outcome of these tests can help decide whether the 2022 selloff is a cyclical bear or the start of a structural bear or trading range.
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