The Line In The Sand That The Market Just Won’t Cross (Yet…), by D. R. Barton, Jr.

D.R. photoA potentially explosive standoff played out in the sands of northern Egypt some 2200 years ago. Chronologically, our story occurs smack in between the 323-year period between the death of Alexander the Great and the birth of Jesus.

As we tune in, an invading force in Egypt (at that time a Roman protectorate) is being presented with a “leave or suffer the consequences” ultimatum signed by none other than the Roman Senate.

Some historical figures just seem to be on the wrong side at every turn. In today’s story, an ancient and ill-remembered king is going to give us the key to trading the current market properly — and as a bonus give us the cool origin for a phrase that will be familiar to everyone reading this.

Antiochus IV Epiphanes, the sovereign of the Seleucid Empire (modern day Iran, Iraq, Syria and parts of central Asia) made a pre-emptive attack on Ptolemaic Egypt, which had previously demanded a return of captured lands.

Let’s get the players straight: After the death of Alexander the Great some 150 years earlier, the power void was filled by four of his generals that would, after intrigue and wars aplenty, turn Alexander’s conquered lands into four kingdoms. Two of those would become the Seleucid Empire ruled by this article’s focal point, Antiochus IV and Egypt ruled by the Ptolemaic dynasty.

In 170 BC, Antiochus’ captured all the major Egyptian cities save the capital city of Alexandria. He left behind a puppet government trying not to invoke the ire of Egypt’s protector — Rome.

But in 168, Antiochus could not leave well enough alone and returned to finish the job of conquering Egypt. Meeting little resistance, he and his army crossed the river Eleusis. This was the last natural barrier separating them from their goal of Alexandria — a mere four miles out. It was there that were met by Rome’s envoy, Gaius Popilius Laenas. He did not have an army with him — just a demand signed by the Roman Senate that Antiochus withdraw or be considered at war with the Roman Empire.

Antiochus held out his hand as a friendly greeting to the elder statesman from Rome. Instead of receiving a handshake in return, the Roman historian Livy records what happened next:

Popilius, however (instead), placed in his hand the tablets on which was written the decree of the senate and told him first of all to read it. After reading it through, he said he would call his friends into council and consider what he ought to do. Popilius, stern and imperious as ever, drew a circle round the king with the stick he was carrying and said, “Before you step out of that circle give me a reply to lay before the senate.” For a few moments he hesitated, astounded at such a peremptory order, and at last replied, “I will do what the senate thinks right.” Not till then did Popilius extend his hand to the king as to a friend and ally.

So, we have the first ever recorded event of someone “drawing a line in sand”. It’s a phrase that means a boundary or limit to what one will accept. Popilius’ line, if crossed, meant a declaration of war.

The U.S. stock market has done the same for us, though the war is between the bulls and the bears. The market has shown us that there is currently a “line in the sand” over which it will not cross. Let’s take a look (and revisit Antiochus and his audaciousness one more time) …

This Line Has Held Every Test for The Past 2.5 Years…

The market has made a major shift since late January. After years of a moving almost straight up, we finally got a significant pullback. The S&P 500 dropped 13.4% from its January high to its February low. The collapse of the inverse volatility trade did what no news item or global economic trend could do — it created the first market correction in almost two years.

But there was one line it would not cross…

Then, from mid-March until early April of this year, the talk of trade wars and the derailing of the Trump Growth Narrative was the main focus of traders and investors.

But the market refused to stay below the “line in the sand”.

And then there was more trade war “sturm und drang” leading into early May that drove the market down for almost two straight weeks.

But the market once again respected the now infamous “line in the sand” …

And what is this market moving “line in the sand”? It’s our old friend, the 200-day moving average (MA). Let’s take a look:

DR Chart 1

Much like Popilius’ demarcation drawn using his walking stick, our line in the sand is just a mental construct, a relatively arbitrary calculation drawn on the chart. What, then, makes it so useful? I can answer that question with one word.

Eyeballs.

Loads and tons of eyeballs are watching this line. As I’ve told you in past articles, when lots of people are looking at an indicator, it becomes an important reaction area. And for two years (as we’ll see below), the reaction of the market to pulling back to this line in the sand has been to rebound up.

But before we look at that longer-term chart, let me give some quick comfort to those of you who might be thinking, “But D.R. — price has dropped below the 200 day moving average several times over the past three months. How can you say that it’s a true ‘line in the sand’?.”

One of the key lessons I had to learn in applying technical analysis is that indicators are not discrete points on the chart. They are zones or levels where we need to pay attention.

Bear in mind that the prices on the chart are determined at a second-by-second auction. Market prices are not just the combined psychology of all market participants at any given moment. As we all know — psychology is far from an exact science. So our tools need to match the flexibility needed to understand that underlying psychology.

And though we’ve had intraday trips below the 200-day MA and even had one close below it, the price has certainly not been able to sustain a consistent move below that level.

Now let’s look at that longer-term chart. Here’s the S&P 500 going back two and half years:

DR Chart 2

When we do get a decisive break below the 200 day moving average, the probabilities are that price will continue down another 5 – 15% (or more) below that level.

Until then — as long as the market’s “line in the sand” holds — pullbacks are to be bought.

I always love to hear your thoughts and comments — and especially your additional insights(!) — please send them to drbarton “at” vantharp.com

Great trading and God bless you,

D. R. Barton

P.S. My Jewish friends (and lovers of history in general) will recognize Antiochus IV Epiphanes for a very different reason than our “line in the sand” example. Because not long after leaving Egypt, Antiochus found time to outlaw Jewish religious practice in Israel — in a significant departure from his Seleucid and Ptolemaic predecessors. He went so far as defiling the Temple in Jerusalem. So not only was the first recorded “line in the sand” drawn around a belittled Antiochus in 168 BC, he also kicked off the Maccabean Revolt in Israel later that year.

That revolt would end four years later. And it was during the re-dedication of the Temple in Jerusalem that the original Hanukkah miracle occurred.

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