Editor's note: This column is a special holiday bonus for readers of TheStreet.com, written by James Altucher of Street Insight. To sign up for Street Insight, where you can read Altucher's commentary regularly, please click here .
Over the past month, the media have had a field day referring to the 200-day moving average. As in: "The S&P index just crossed its 200-day moving average. This is a very bullish sign." " Microsoft ( MSFT) crossed its moving average, so we should expect to see a nice upwards move over the next week." I was skeptical. It doesn't seem to make sense to me that this would be a bullish event. Most of the time when I read or hear about the 200-day moving average people are talking about the entry -- or the crossover of the average -- but never the exit, so it was hard to formulate a successful trading strategy. Also, I was never sure what people meant by the word "bullish." Does this mean the market goes up forever now -- or just tomorrow? To make sense of things, I decided to take a closer look at the 200-day moving average, what it signals and exactly how "bullish" it is. In general, my focus as an investor and hedge fund manager is to develop a hypothesis about the markets, whether based on fundamentals or price action, and test, test, then test again. No words of wisdom, or so-called 'truisms', about stock or indices are above being rigorously studied and verified as best one can before investing money. I ran a few tests to get to the bottom of the 200-day moving average. I attempted to mirror and test the media prognosticators who forecast the change in trend with each move in the 200-day moving average. As you will see later on in this column, I came up with a long-only system -- in other words, it's only good for the long side of the market -- for using the 200-day moving average as a countertrend indicator that has worked well in both bull and bear markets. But first things first: What is the 200-day moving average?