by John Lansing | August 17, 2012 8:45 am
I have uncovered a very rare event that could be unfolding for the first time in many investors’ lives: a “death cross.”
If it occurs, this would be the first time in more than six decades that we’ll have seen a 50-month and 200-month simple moving average cross in the S&P 500, and it would be the first one in the bear camp — an event called a death cross.
In simple terms, a bearish “cross” is when the 50- and 200-month SMAs — whether they’re on a daily, weekly or monthly chart — get inverted. When this type of cross occurs, it’s often referred to as a death cross and is confirmed when it happens on volume. Conversely, when the 50-month simple moving average crosses above the 200, it’s referred to as a “golden cross” and typically causes the underlying to rise; just like its counterpart, a golden cross is confirmed on volume around the time it’s happening.
Click to Enlarge To be clear, this has not happened yet, but these monthly moving averages are just points away from a death cross because the 50-month simple moving average is on the decline, heading right for the 200-month moving average in the S&P 500.
But some perspective and context are needed. No one should interpret this as an omen of a major overnight decline in U.S. markets, particularly because this is occurring on the monthly chart.
That said, when a death cross happened in the French CAC 40 (CAC) last year, its market dropped more than 30% just three months later. Similarly, when the same monthly chart event happened in the Nikkei back in the late 1990s, a decline of more than 30% occurred on the index in the months that followed.
So, while this doesn’t necessarily mean a 30% drop on the S&P will happen today, when a death cross has occurred recently in overseas markets, it has led to significant declines in relatively short order.
While the markets have moved up in recent weeks, take note that the large-caps are simply propping up the indices, but all of the indicators and oscillators continue to indicate a selloff is coming, and the bias still remains bearish. And for that reason, it’s imperative that traders have some downside exposure.
Now, while I’ve pared down long positions for my Trending123 subscribers to prepare for what I expect will be a significant decline in the broader markets, this doesn’t mean I think anyone should be on the sidelines.
I use a variety of instruments to profit from the market’s pitfalls, but for those who are averse to options or shorting stocks, inverse ETFs might be the thing for you. As the name implies, inverse ETFs increase in value when the broader markets drop.
There are a variety of inverse ETFs from which to choose that correspond directly to the S&P 500 — and some of them are leveraged two or three times, so you get more bang for your buck. You certainly can go that route, and sometimes I do.
At the moment, as it relates to the S&P, personally, I think shorting shares of the SPDR S&P 500 ETF (NYSE:SPY) is the better bet. But if you don’t have the margin account or the risk appetite, an inverse ETF at the top of my list right now that you can go long is the ProShares Short Dow30 (NYSE:DOG).
DOG trades opposite the Dow Jones, meaning this goes up when the Dow goes down.
DOG recently gapped down, setting up support just below the $35 level, which is exactly where I set ideal entry. My initial target is $42 in the shorter term, but I might need to revise that up.
Again, to be perfectly clear, as of now the monthly chart does not sport this bearish death cross pattern. The possibility only exists because this is the first time in more than six decades that we’ve been this close to even think it was remotely possible … until now.
I’ll let you know as more unfolds, but you can become a Trending123 member and get ahead of the market’s move before it happens.
Source URL: http://investorplace.com/2012/08/a-dog-defense-against-the-death-cross/
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