An in depth look at the SPDR S&P 500 ETF (NYSE:SPY) 50 MA Long/Short strategy in its best and worst years reveals its key fortes and failings. Of the ten years tested, 2008 came out on top while 2000 settled dead last. What was it about 2008 that made the 50 MA such a lucrative signal? What about 2000 made the strategy fail so miserably?

Consider the 2008 (NYSE:SPY) chart below with the highlighted crossovers.

The notable performance in the trading strategy for 2008 is a direct result of the trending nature of the market in that time frame. Simply put, moving average trading systems shine in trending markets. If a stock experiences strong follow through after breaking above or below the 50 MA, this approach is a virtual ATM machine. Since the rules dictate one is always long or short the market, it allowed unfettered participation in the lion’s share of 2008’s sell-off.

Since the 50 MA is most effective in trending markets, reason would tell you it must be quite ineffective in non-trending markets. Might this be the trouble with its performance in 2000? Consider the following chart.

As you can see the first two thirds of 2000 were a veritable chop-fest rife with many a false signal. Though the last few months produced solid profits for a short trade, it wasn’t closed until early 2001. Thus, the Achilles heel of this strategy is undoubtedly range-bound market.

Unfortunately it’s difficult to consistently forecast whether the market will exhibit trending or range-bound behavior. Thus, the hope with the 50 MA strategy is that the draw downs incurred in the occasional choppy market are overcome by the profits captured once the market starts trending again. That hope certainly bore fruit over the last decade. Whether it remains as potent going forward remains to be seen.

Written By Tyler Craig From Tyler’s Trading

www.tylerstrading.com

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