The 40-month Moving Average
Moving averages are one of the most popular technical indicators for traders and investors. If one knows how to use moving averages, they can help uncover trends. However, as with technical indicators, selecting the correct time frame is 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 the premiere longer-term moving average indicator. Similarly, the 50-day ma identifies intermediate-term trends. The 10-day and 30-day moving averages can provide indications of shorter-term trends.
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 often 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 it tracks through the self-fulling prophecy.
The monthly charts may be the best timeframe for longer-term trends, including structural (i.e., 8 – 20 years) and generational trends (35 – 42 years). The 40-month ma may offer investors the best moving average period 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). Violation of the 40-mo ma and the rolling over (downtrend) 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 recent Feb-Mar 2020 pandemic-induced cyclical bear decline, SPX has successfully tested the 40-mo ma (currently at 3,601), leading to the resumption of the May 2013 structural bull. Will the current Jan 2022 decline retest its 40-mo ma? Will a successful test reaffirm the resumption of the structural bull? On the other hand, will the violation of the pivotal moving average warn of a structural bear?
Enclosed are monthly analyses of the SPX Index and the corresponding 40-month ma and the % Distance of SPX from the 40-month ma indicator. SPX appears headed for a retest of this critical 40-month moving average (3,601). The outcome of this test can help decide whether the Jan 2022-present selloff is a deep correction, cyclical bear, or structural bear.