For those who missed the late Friday post market close news about Moody’s downgrading the US debt below AAA rating, good for you. Because you likely would have also avoided reading through the various commentaries around what happens to the stock market when such a thing happens.
To be clear, a credit rating downgrade is a big deal. It means that the downgraded instrument is not as safe as it once was. The natural fallout is that the interest to be paid on the debt should go up thus making overall borrowing expensive and hurt businesses profit margins.
The last 2 times this happened; the stock market did go down -8% to -10%. So, should we expect a similar fall this time as well. That is the debate that has already started since the news was released Friday and I am sure that many an analyst weekend would have been consumed with this.
I have no idea what is going to happen. I do not even know whether I should believe the folks who say we should prepare for -10% fall or I should believe the folks who convincingly say this time is different and we will not have that much of a pullback.
I do not know what to believe and I do not know what is going to happen. But I do know what I am going to do. I am going to ignore all these news and commentary and just focus on what is really happening. What is price really doing?
This is the SPX daily chart.
We have had a steep rise in price since the day we touched the recent low on 4/7. During this rise we did create a higher low on 4/21 and then we created a higher high when we crossed the prior high around 5783.
During the course of this steep rise, price also crossed over the 200-day moving average. This 200-day moving average is currently at 5771. Price itself closed Friday at 5958. This morning at pre-markets it is down to 5843.
Assuming the SPX price opens at 5843 or thereabouts, it would still be well above the 200-day moving average. Per my system nothing would have changed, and I would just consider it a regular down day. Although it would still be a big down day.
I consider the 200-day moving average, which currently is at 5771, as the first level of price support for the SPX. If and when price falls there, then I want to see what price does after that. Does price use that as a support and bounce higher? Or does price just cuts through that and crosses below?
That really is what it boils down to. Is the 200-day moving average going to hold or is it going to fold. Once we see what happens there, we can do more analysis.
Whatever you decide to do, I recommend staying calm and using your system to tell you what to do. I make my mistakes when I do not take this - my own - advice.
I will be active on the X platform this week and will also try to write here more often this week.
Have a great week ahead.