Traders use technical tools applied to the price action to determine whether the market bias is more bullish or more bearish. In my analysis, I consistently use the 100- and 200-hour moving averages as one of the limted amount of tools I use.
Why?
Because traders around the world watch those moving averages when making trading decisions. They use them to determine the directional bias, identify potential targets and—most importantly—define and limit risk. Since so many traders are focused on the same levels, the moving averages often become key battlegrounds between buyers and sellers. That is a key belief for me and should be for you too.
When the price moves below the 100- and 200-hour moving averages, the short-term bias turns more bearish. Staying below keeps the sellers in greater control. Conversely, when the price remains above those moving averages, the bias is more bullish and the buyers have the stronger hand.
The important words are “stays below” or “stays above.” A brief move through a moving average is not always enough to confirm a change in control. Traders want to see momentum continue and the price remain on the new side of the level. Nevertheless, the break is something that should not be ignored, and if the price does “fail” that is part of trading. Not all trades are profitable. However, traders can define and limit their risk against these technical levels.
So what about the S&P index?
Looking at the S&P index, the price is currently down 23 points at 7,651. The decline has taken the index below its nearly converged 100- and 200-hour moving averages around 7,687.
That keeps the short-term bias tilted to the downside. As long as the price remains below those moving averages, the sellers are in greater control. The same moving averages also provide traders with a clear risk-defining area. If the price rebounds and moves back above them, the bearish bias would weaken.
On the downside, the next target is a swing area between 7,577.92 and 7,617.37. That area is defined by several swing highs and swing lows going back to late May and early June. Buyers may lean against that area on the first test. However, a sustained break below it would increase the bearish bias and shift the focus toward the rising 100-day moving average at 7,486.85.
What about the Nasdaq index?
The Nasdaq Composite is telling a different technical story.
The index is down around 100 points, or 0.38%, at 26,323 after reaching a session low of 26,271.23. However, it remains near and currently above its nearly converged 100-hour moving average at 26,284 and 200-hour moving average at 26,283.
As long as the Nasdaq can stay above those moving averages, the buyers remain in greater control and the short-term bias remains more bullish. It would take a sustained move below both moving averages to shift the bias more decisively to the downside. If that happens, traders would begin looking toward the rising 100-day moving average at 25,929.
Divergent technicals in the two broader indices
So although both major indices are lower, their technical biases are diverging:
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The S&P is below its 100- and 200-hour moving averages, giving it a more bearish short-term bias.
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The Nasdaq Composite is holding above its 100- and 200-hour moving averages, allowing it to maintain a more bullish short-term bias.
Something eventually has to give. Either the S&P rebounds and moves back above its hourly moving averages, or the Nasdaq breaks below its corresponding moving averages and joins the S&P with a more bearish bias.
For now, the broader market is sending a mixed technical signal. Traders should let the price action determine the next move. Watch whether the S&P can reclaim 7,687 and whether the Nasdaq can remain above the 26,283–26,284 area. Those levels will help tell us which side—buyers or sellers—is taking greater control.
This article was written by Greg Michalowski at investinglive.com.