A loss of momentum in a downtrend

Dean Christians

2022-08-23

Key points:

The MACD indicator triggered a sell signal for the S&P 500
At the same time, the 200-day moving average for the S&P 500 is declining
After other MACD sell signals, the S&P 500 showed negative returns
If an alert occurs with the S&P 500 < 20% from a high, the outlook is worse

A short-term trend following indicator lost some momentum

The Moving Average Convergence Divergence (MACD), invented by Gerald Appel, is a trend following momentum indicator. On Monday, the differential between the MACD line and its nine-day exponential moving average turned negative, with the MACD line in positive or overbought territory. At the same time, the index remains below the 200-day moving average, and the 200-day has been declining for 84 consecutive days.

Let's conduct a study to assess the outlook for the S&P 500 when the MACD indicator gives a sell signal under similar conditions. I will lower the successive days with a declining average to 80 sessions to increase the sample size.

Similar MACD sell signals in a downtrend preceded negative returns

A loss of momentum from overbought territory within an established downtrend looks unfriendly across short to medium-term time frames. The signal shows a loss at some point in the first two months in 29 out of 37 instances. The median return a year later looks favorable as signals that occurred in the later stages of a downtrend show healthy gains.

Signals that occurred when the S&P 500 was down 20% or less from a multi-year high, which is the case now, show a significantly worse outlook across all time frames. Once again, the first few months look troubling, with a negative return at some point in 13 out 15 instances.

What the research tells us...

We've had a nice rally off the June lows with several thrust signals showing broad-based participation from index members. The weight of the evidence continues to favor the bulls. However, we always need to keep an open mind and remember that the market can throw us a curve ball from time to time. The rally and loss of momentum in the initial stages of an established downtrend should keep us alert to all possible outcomes.