I’ve gotten quite a few emails today about the 200DMA and its significance.  Regular readers know that I am relatively skeptical of charting markets and using nothing but charts as a guide to gauge future market prices.  After all, a chart is nothing more than the market’s past pricing of a particular asset’s future expectations.  A chart alone doesn’t tell the whole story.  As I’ve said before, using charts alone is like looking at the cover of Macbeth to decide whether or not the book will be good.  You can’t discover the true genius behind the picture without diving into the actual text.  In the case of financial markets this involves looking at the fundamentals and any other potential influences.

But every once in a while you have an indicator that is so widely followed that it must be respected.  The 200DMA is that kind of indicator.  As I said back in early May:

I am not a big fan of charting the market.  Charts are great for visualizing where we’ve been and what has happened.   But there are a few times in the investment world where an indicator is so widely followed that you just have to respect it.  One such indicator is the 200 day moving average.  There are few charting indicators that are more widely followed than the 200 day moving average.  Many view it as the level that differentiates true bull and bear markets.  The market is reaching a point of critical mass.  We’ve experienced an incredible unrelenting 40% rally from the lows on questionable fundamental drivers.  With the fundamentals still unreliable it looks like the technicals could be reaching a point of exhaustion.  The market appears to have a date with destiny near S&P 950, but expect that test to fail multiple times before and if it is able breach and hold that level.  The real test of this market lies just before us.

As of now I do not believe that the fundamentals of this market justify the “new bull market” chatter, but a sustained move above S&P 950 could inject this market with a lot of confidence and at the end of the day an economy is only as strong as the confidence of its producers & consumers.