WHY I USE THE 50-DAY AVERAGE SO MUCH -- AN AWFUL LOT OF MARKETS ARE FINDING SUPPORT AT THAT LINE -- SOME ARE BOUNCING OFF 200-DAY LINES
WHY I USE THEM ... As you know, I place a lot of importance on moving average lines. Not because they're infallible, because they're not. Or because they're the most important of all the indicators I look at. Because they're not. For people like me, however, who look at so many markets all over the world, moving averages provide a relatively simple way to determine which markets are doing the best, and which ones are getting into trouble. The line that I rely on the most is the 50-day (or 10-week) moving average. That's because it's a good gauge of short- to intermediate-term trends which is where I like to operate. The 20-day line is better for very short-term trends, while the 200-day is better for long-term trends. The 50-day is right in the middle. Some of you have messaged me to the effect that the 50-day isn't that effective because markets can break it and turn back up again (which, by the way, is usually a positive signal). That's exactly what happened with some of the major market indexes recently, like the S&P 500, which fell below the 50-day line only to rise back above it again. Before anyone dismisses its value, however, I thought I'd review the large number of markets that have bounced off their 50-day lines recently. I think you'll be surprised at how well it's worked in most cases. Take the first three charts for example. The New York Composite Index, the S&P 400 Mid Cap, and the S&P 600 Small Cap Indexes bounced right off their 50-day lines just as they should do in a short-term pullback. There are a lot more.
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BASIC MATERIALS AND GOLD TEST 50-DAY LINES... The next three charts show the Materials Sector SPDR, the Gold & Silver (XAU) Index, and the StreetTracks Gold Trust Shares (GLD) bouncing off their 50-day lines. There's no guarantee the lines won't be broken either now or in the future. But so far they're holding. Several foreign stock market ETFs are bouncing off their 50-day lines.
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FOREIGN ETFS BOUNCING OFF 50-DAY LINES ... A quick scan of the foreign stock ETFs produced the next five charts. Canada iShares (EWC), Switzerland iShares (EWL), Taiwan iShares (EWT), and the United Kingdom iShares (EWU) are finding support at their 50-day lines. Some have dipped just below that line, but are trying to regain it (like Japan iShares). Others didn't quite touch their 50-day lines, but stayed above them (like the EAFE Index iShares and Emerging Market iShares (EEM).
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GROUPS BOUNCING OFF 200-DAY LINES ... One of the ways to tell if a stock, a market group, or the entire market is in trouble is whether or not it finds support around its 200-day average. There are several group indexes either testing or bouncing off their 200-day lines at the moment. Their ability to find new buying near that long-term support line tells us something about the viability of their uptrends and also about the staying power of the bull market in stocks. The groups testing their 200-day lines include utilities and pharmaceuticals. Three groups that have just bounced off their 200-day lines (and moved back over their 50-day lines) include airlines, the Consumer Staples SPDR (XLP), and the Consumer Discretionary SPDR (XLY). That's why we watch moving average lines so closely. All of the daily charts on this site include a (blue) 50-day average and a (red) 200-day line. They were put there at my request. Now you know why. You also know why I use them so much. They're not perfect. But I believe that they're among the most useful tools that technical traders have at their disposal. The fact that so many 50- and 200-day moving averages are holding is a good sign for global stocks in general.
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