Hell for me would be forced to trade large when the SPX closes to the 200 SMA. I hate it! Now, there are many theories about why the market jerks and chops as it bounces around the 200 SMA–big institutions, hedge funds, etc. Doesn’t really matter. I just know that chop and churn is what we’re in for when the SPY comes within 5 % of the venerable 200 SMA, so I try my best to stay away, to “sit on my hands” as Alex says.

Here are two charts that show this behavior. The first is from May 2008 as the SPY closes on a flattening 200 SMA. Note the price candles with shadows and tails and nothing much happening–this is churning–up big in the morning, selling off in the afternoon, or the next day, down in the morning, up in the afternoon. Notice too, that momemtum is ebbing, and we have a triple bearish divergence on the MACD-H leading to evenutal price failure. This time around, we’ve spent a month churning in a consolidation, then popped through a declining 200 SMA. Things look a bit shaky now; we may have a false break out developing. Note again the triple divergence in the MACD-H.

I’ve noticed this chop and churn behavior around the 200 SMA over the years and always wondered what causes it–maybe some day, I’ll find out, but I just know that I’m better off trading small or staying away until prices clear in one direction or another from the 200.