RealMoney Silver - Watch the 200-Day Averages

Watch the 200-Day Averages
By Helene Meisler
RealMoney.com Contributor
11/8/2007 9:04 AM EST

If the action over the past few weeks hasn't convinced people that this is not last year, then I don't know what will. I've said repeatedly that this market does not act the same way last year's did, and I still believe that to be true.

I must admit I was very bothered when I turned on CNBC yesterday to see one of their commentators discussing my very scenario of a move down between now and Thanksgiving with a low around Thanksgiving for a year-end rally. If that is the consensus view, I don't like it one bit! If it's going to work, we need to scare those folks out and make them rethink that view.

In the meantime, I was quite surprised to see the still-bullish bent on TV yesterday. How can I tell? Let's begin with the fact that the Transports made a lower closing low. They beat out their August closing low by almost 20 points. Not one mention anywhere on that.

I am no expert on the Dow Theory, but it seems to me this would be considered a Dow Theory negative, not a positive.

Then there was the fact that the S&P 500 closed below its 200-day moving average; I also saw no mention of that. When there is panic, we get all sorts of statistics where folks are quoting these types of things -- yesterday there was none of that.

Speaking about 200-day moving averages, there are two we need to discuss. Let's begin with the Trannies. 200 days ago was late January (the 25th, to be exact). I have noted it on the chart with an arrow. At that time, the Trannies were trading around 4800 on their way to 5160 just before the February crash-ette.

A moving average is simple math: We add today and drop 200 days ago. So with the Trannies now trading around 4660, we will be dropping 4800 on up to 5160 for the next month or so and replacing it with lower numbers. That means the moving average will start to turn down. (It's the blue line on the chart.)

50 days ago was late August, noted on the chart with an arrow. Should the Trannies break from here, that 50-day moving average (the red line) will turn down as well. Of course, I believe it's more important that the 200-day is turning down; as you can see, it takes so much to turn it down, and the likelihood of it turning back up doesn't seem very high unless oil suddenly collapses down to 60 or 70 bucks.

It is considered a change in trend when the long-term moving average rolls over.

With that in mind, let's look at the Russell 2000. Late January is indicated on the chart with the leftmost arrow. We are now trading below that level. And that rally in February has yet to be dropped off the moving average -- that's what's coming up. So it is now very likely that the long-term moving average (the blue line) will begin to roll over on this chart after a very long run of moving ever upward.

I suppose the minor bit of good news is that the Russell has yet to break its August lows, but you can see with the rightmost arrow that if the RUT doesn't rally soon, the 50-day moving average will turn down after dropping its September rally.

You will also notice I've drawn in what is a potential head-and-shoulders top in the Russell 2000 that I don't see anyone talking about. Should it come to fruition, it measures to about 650.

So for those of you who wrote me and asked what comes after that potential Thanksgiving rally, here's the problem that has been developing in the market for months now: There are trends that are changing with the 200-day moving average lines starting to flatten out and threatening to begin rolling over. Think about what it takes to turn a 200-day moving average line around (think supertanker), so when they turn, it is not something you want to ignore.

In the meantime, if we can get some fear and panic as we head into Thanksgiving, we still have a very good chance of a year-end rally. And when I see that the American Association of Individual Investors survey for this week (released this morning) -- which would not have included yesterday's action -- chimes in with over 50% bears, I can see how sentiment might just line up with the indicators I discussed yesterday to give us a low around Thanksgiving.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.