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Self-fulfilling Prophecy For a Fine Balancing Act

Yesterday the Dow Jones Industrial Average tested 200-day moving average support while the S&P 500 fell after having tested same average resistance the day before. This appears like a fine balancing act with a self-fulfilling prophecy.

I have argued in this blog several times that the 200-day moving average, with which the financial media is infatuated, is just a self-fulfilling prophecy they enforced some years ago.  Here for example:

In the 1980s financial media (FNN now CNBC) and analysts reinforced the importance of the 200-day simple moving average by constantly referring to it. Actually, they raised it to the status of an indisputable principle.

It just makes no sense to pick one period for a moving average and raise it to the status of a key indicator. This is irrational but the financial media did it and they proved reflexivity rules the markets (You can find my M4 conference Reflexivity presentation here.)

Yesterday the Dow Jones Industrial Average tested 200-day moving average support while the S&P 500 fell after having tested same average resistance the day before, as it may be seen below. Click on image to enlarge.

The Dow Jones is outperforming S&P 500 by about 226 basis points since the correction started on September 20, 2018. The Dow Jones is an important index despite naive perceptions to the contrary. See this article for more details. 

Assisted by the self-fulfilling prophecy of the 200-day moving average, Dow Jones is attempting to establish a base at 25K. If this effort succeeds, the broader market may also find support. This is how these self–fulfilling prophecies work.


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