Does the stock market have a momentum problem? Yes, according to a number of market technicians, the folks who study the price charts for signs of things to come. The primary clue is the S&P 500’s recent history vis-à-vis its 200-day moving average, which is widely monitored by professional chart readers.

Chartists point to the resistance level of recent weeks represented by the 200-day average. Three times since late-October the market has tried and failed to rally above this level and hold its ground. Last week was another attempt, with the S&P 500 trading just under the 200-day moving average. The continued failure of the market to convincingly pierce its 200-day average would send a bearish signal and raise questions about the recent rally, technicians warn.

Is the 200-day moving average a fail-safe signal of the future? No, but its history is strong enough to take it seriously as one of several indicators for developing intuition about expected return. Yet “no major university offers comprehensive professional instruction in market technical analysis,” notes Kent Osband in his recent book Pandora’s Risk: Uncertainty at the Core of Finance.
Perhaps that’s set to change. There seems to be a renaissance in reconsidering technical analysis signals generally as predictors. A recent academic study reports that a “moving average timing strategy of technical analysis to portfolios sorted by volatility generates investment timing portfolios that often outperform the buy-and-hold strategy substantially,” a finding that the authors label a “new anomaly.”
Actually, it’s not so new, but it may be timely in the final trading sessions of 2011. Bespoke Investment Group advises on Friday after the market’s close:

After three straight days of trading above but then closing below its 200-day moving average, the S&P 500 had its worst day of the week yesterday and closed down 2.1%. So with three straight failed attempts, is the market set up for a big let down?

Since the mid 1980s, there have only been four other times where the S&P 500 had a similar pattern of trading above its 200-day moving average on three consecutive days, but then closing below that level on all three days.

Not so fast, counters RBC technical analyst Robert Sluymer via The Wall Street Journal. He thinks it’s too early to give up hope:

Short-term trading indicators, tracking 2-4+ weeks shifts, have moved up from deeply oversold levels established at the end of November, but they have not yet reached overbought levels normally associated with a new corrective phase. Daily momentum indicators…suggest it is premature to conclude the rally is aborting and that another 1-2 weeks of recovery cannot be ruled out yet.

But with so much uncertainty still swirling about over the ongoing euro crisis and the debate about the state of the U.S. economy, Sluymer’s optimism may fall on deaf ears until, or if, the S&P 500 tells us otherwise via price in context with the 200-day average.