Since 1989, in spite of the major upward bull move, the market has returned (after 1-week) two-fifths of what it returned above the 200 day moving average. Said another way, the average weekly gain of the S&P 500 has been 2 1/2 times more above the 200-day moving average than below. What does this tell us? First, that it is tough to pick bottoms. Secondly, that it’s better to be shorting stocks and the market when they are trading below the 200-day moving average. As we saw in rule Number 3, trend plays a strong role in determining the potential success of your trades.
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You can also read the next installment in our series: Rule #5 – Use the VIX … It Works!, by clicking here.
David Penn is Editor in Chief at TradingMarkets.com.