For the stock market, only one indicator on one chart is important this week.

The S&P 500 is challenging its 200-day moving average (MA).

A breakout should lead to a sharp rally. A failure should lead to another leg down in the bear market.

The MA is the blue line in the chart below.

Moving Average: Huge Indicator for Traders

moving average, ma

This line is important because traders watch it for signs of overall market sentiment.

There is nothing significant about 200 days. Even the idea of a MA isn’t that important.

But anything that traders follow is worth noting.

Why Traders Follow the MA

The MA indicator defines the overall market trend.

When prices are above the MA, the trend is up. A downtrend is when prices are below the MA.

Since the bear market began in December, the S&P 500 has tested the MA twice.

When prices failed to remain above the MA, a sharp sell-off followed.

On August 16, the SPDR S&P 500 ETF (NYSE: SPY) moved $0.40 above the MA before closing below the line.

And a large number of traders noticed.

Failing to hold above the MA set off fears that the bear market might resume. It was enough to trigger a sell-off in the current environment.

The summer rally helped many traders reduce their losses for the year. Many are motivated to avoid large losses again, and selling achieves that.

What’s Next for Markets

Selling is the reason prices fall.

As more and more traders sell, the downtrend will accelerate.

On the other hand, if buyers return to the market, they could push SPY back above the MA.

There’s nothing on the chart suggesting that is going to happen.

But if it does happen, the bear market could be over.

Bottom line: Investors shouldn’t count on that.

They should prepare for another move down to the previous bear market low in June.

This could be an extended bear, like the one we saw for 15 months starting in 2008 or the one that lasted almost 30 months starting in 2000.

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Michael Carr is the editor of True Options Masters, One Trade, Precision Profits and Market Leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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