In trading, mean reversion is commonplace. Momentum, whether to the upside or the downside, eventually wanes and stock prices stabilize.
Stocks often trade in a range, with the price action reflecting choppy moves either up or down. The big money is usually made in trending moves higher or lower, often spurred by institutional money flow in large volume. And then you have what we like to refer to as periods of indecision.
$BABA : Alibaba Group Holding Ltd. ; $SPY : SPDR S&P 500 ETF Trust ; $IWM : iShares Russell 2000 Index
As the chart above reflects, the S&P 500 Index, as represented by the SPDR S&P 500 ETF Trust (NYSE: SPY), has been coasting along its 5 Day Moving Average (DMA) since bouncing back to achieve new all-time highs after the mid-October sell off. Friday's close marks twenty-one trading days that the SPY has closed above this level.
A recent article from Business Insider notes that the longest streak for the S&P 500 above its 5 DMA is twenty-three trading days, achieved once in December 1996 and again in July 1998.
Notably, for other big names in the market, the 5 DMA has recently been breached to the downside. Considering that the SPY is very close to breaking its historic streak, does the recent weakness in other popular market plays foretell a pullback for the SPY as well?
Namely, the Russell 2000 Index, as represented by the iShares Russell 2000 Index ETF (NYSE: IWM), closed below its 5 DMA for the first time since mid-October on Thursday, 11/13. The bulls were unable to regain this technical price level on Friday, and IWM finished off the week at $116.69. Unlike SPY, IWM has also not achieved new all-time highs since the mid-October broad market rally. Its 5 DMA is currently at $117.23.
A similar observation is noted for Alibaba Group Holding Ltd. (NYSE: BABA). After the bulls were unable to breach overhead resistance at the $120 double-top level, the stock pulled back on 11/13 to close decidedly below its 5 DMA for the first time since mid-October. Just like with IWM, BABA bulls failed to recapture the 5 DMA on Friday, and BABA finished off the week at $115.10. Its 5 DMA is currently at $116.37.