U.S. Markets close in 20 mins

Keep an eye on the S&P 500's 200-day moving averge and here's why

The greatest strength of a man or methodology is often its greatest weakness. A gentle heart can be mistaken for a lack of resolve. A singular focus can hide a lack of vision.

As is true of philosophy, so it is in investing. Fundamentals are how stocks are “supposed” to be valued but an even cursory examination of market history reveals countless, often massive dislocations between reality and financial promise.

In financial markets as volatile as we’ve seen over the last month the simplicity of charting can be a Godsend. Fast markets are emotional, almost by definition. The S&P 500 (^GSPC) dropped 9.8% in three weeks, reversing sharply last Wednesday and now sits about 2% from where it was at the beginning of the month.

If you can think of anything that has fundamentally changed the discounted value of all the future cash flows of the S&P 500 by 10% in the last three weeks I’m all ears. Otherwise you’re just going to have to accept that there’s some value in using investing disciplines beyond accounting.

Brian Shannon of Alpha Trends says keep an eye on the 200-day moving average on the S&P 500. It may signal when we're out of the volatility woods.

In the attached clip Brian Shannon of AlphaTrends says this rally may not be signalling an all-clear for stocks but it has given us some nice trend lines to use as entry points and stops. Specifically he’s watching the 200 day Moving Average on the S&P 500. As highlighted last week the 200-day is currently just over 1,900. Once that was pierced to the downside it led to a quick slide for stocks to within just three points of our original 1,817 correction target.

Now that stocks have rallied sharply over that level Shannon is watching it as support. “The good news is the 200-day is advancing. We had a big washout in volume and so far we’ve seen a very nice recovery.”

Of course no one is pushing hard for getting long on a 6% rally in four days. Shannon would like to see stocks drift down over the balance of the week and test that moving average to give him more confidence.

Usually rallies don’t give you everything you want. For those who missed the move higher and are stuck between long and terrified 1,905 or 1,906 can be looked at as a stop-loss level you can use as an automatic trigger for limiting your losses, should the market collapse again.

More from Yahoo Finance:
3 financial products to avoid at all costs
Top 10 college towns for landlords
A Mega-bull's playbook for market selloffs