It rarely ever happens, but when it does, it’s serious. It has only happened nine times in 10 years. We are referring to crossovers between the 200-day and 50-day simple moving averages (SMAs).

Very few technical indicators receive as much attention and media coverage as the 50 and 200-day SMAs. The 200-day MA is perceived to be the dividing line between a stock that is technically healthy and one that is not.

It’s a Big Deal

It’s a big deal when a stock or an index drops below the 200-day SMA. It’s an even bigger deal when the 50-day SMA of any given stock or index drops below the 200-day SMA. Such a crossover reflects internal weakness – at least in theory. We'll discuss in a moment how the actual numbers match up with theoretic assumptions.

On June 22, 2010, the S&P 500 (SNP: ^GSPC) and Dow Jones (DJI: ^DJI) dropped below the 200-day SMA. One day later the Nasdaq (Nasdaq: ^IXIC) followed.

On July 2, 2010, the 50-day SMA for the S&P (NYSEArca: SPY) dropped below the 200-day SMA. On July 6, the Dow Jones (NYSEArca: DIA) followed. As of today, the Nasdaq (Nasdaq: QQQQ) is barely hanging on.

This sounds like a doomsday scenario. Does a rigid analysis show that there is validity to 200-day and 50-day SMA crossover buy/sell signals? Let’s investigate.

Crossovers – Lagging but Notable

Many argue that the SMA crossover is a delayed signal that emphasizes past weakness more than it foreshadows future declines. To an extent, that is true. There are other warning signals that point to a market turn long before the SMA does.

For example, on April 16, 2010, the ETF Profit Strategy Newsletter noted an extremely low put/call ratio along with other bullish sentiment extremes. The newsletter stated that “the message conveyed by the composite bullishness is unmistakably bearish. Once prices start to fall and investors get afraid of incurring losses, the only option is to sell (due to the low put/call ratio). Selling, results in more selling. This negative feedback loop usually results in rapidly falling prices.”

Prices did fall rapidly. The 22 trading days following the April 26 high, erased eight months worth of gains. It took a 17% drop for the SMA crossover to trigger a sell signal.

When the ETF Profit Strategy Newsletter issued a strong buy signal on March 2, 2009, it emphasized that the developing rally would be a counter trend rally followed by a steep decline and maintained this viewpoint even though prices kept rallying relentlessly into the April highs.

The SMA crossover now expresses the possibility that even lower prices are ahead.

200 and 50-day SMA Crossovers – How Accurate?

How about the SMA crossover track record? Over the past 10 years, there have been nine S&P SMA crossovers with five sell and four buy signals. We have yet to see the results of the most recent sell signal. However, of the eight previous signals, six were correct. Average gains following each signal were 14.91%.

$10,000 invested according to the buy/sell recommendations given right after the first sell signal was triggered on October 30, 2000 at S&P 1,399, would be worth $24,769 today.

More Than just Crossovers

If it sounds too good to be true, it often is. As is the case with so many technical indicators, crossovers need to be viewed in context with other indicators. In other words, take a step back and evaluate how crossovers fit into the larger picture.

The larger picture (going back to 2007) reveals that trading volume associated with market declines has been generally high, while trading volume seen during rallies has been generally low; a bearish sign.

Does Wednesday’s 3.13% Rally Invalidate the Sell Signal?

On Wednesday, the S&P rallied 32 points or 3.13%. The Dow rallied 2.82%, while the Nasdaq rallied 3.13%. Does this mean the bull market is back on track?

Since the April market top, we’ve seen about a handful of 2-3% bounces. All associated gains were erased within a matter of days. Chances are this time will be the same. In fact, some sort of bounce was to be expected.

On July 5, the ETF Profit Strategy Newsletter stated “considering that the S&P is butting against the 100-week SMA, lower accelerations band, 38.2% Fibonacci retracement levels, round number resistance at 1,000, and weekly s1 at 994, there is a good chance we will see some sort of a bounce develop from the 990 - 1,015 area. Weekly r1 at 1,066 and pivot at 1,063 should serve as resistance.” This bounce is in its later stages right now.

What’s Next?

Let’s revisit the larger picture. Out of the nine leading industry sectors, seven have seen their 50-day SMA cross below the 200-day SMA – financials (NYSEArca: XLF), technology (NYSEArca: XLK), consumer staples (NYSEArca: XLP), materials (NYSEArca: XLB), utilities (NYSEArca: XLU), energy (NYSEArca: XLE) and healthcare (NYSEArca: XLV).

The consumer discretionary (NYSEArca: XLY) and industrial sector (NYSEArca: XLI) are the only holdouts. All nine sectors, however, trade below their 200-day SMA.

Fundamentals, sentiment readings and valuations also point south.

Some of the fundamentals we have discussed in these pages are crafty accounting practices designed to hide huge losses racked up by big financial institutions not yet realized along with a continually bad unemployment picture.

Sentiment surrounding the April highs recorded extremes not seen since the 2000, 2007, and even 1987 market top. There are multiple sentiment measures (such as the VIX, cash allocation, put/call ratio, percentage of bullish/bearish advisors, mutual fund cash levels, etc.).

Each sentiment measure is one piece of the puzzle. The more pieces of the puzzle you have, the clearer the picture becomes. Leading up to the April highs, nearly all sentiment indicators peaked, painting a complete bearish picture.

In summary, the bearish picture is confirmed by technical indicators, a fundamental outlook, sentiment gauges, and valuations.

Based on what the market considered fair market valuations at prior historic market bottoms, one can conclude how far stocks have to drop to reach the previously attained level of fair valuations.

The ETF Profit Strategy Newsletter includes a detailed analysis of four valuation metrics with a track record of accuracy, along with the implied target range for an ultimate market bottom. This is provided in addition to its short, mid and long-term forecast.

When the market speaks, it behooves investors to listen. Fighting the tape has often proven to be foolish, as the market will always have the final word.