Friday, April 09, 2010
Tracking Market Strength With Moving Average Indicators
A useful display in the Barchart site charts the percentage of stocks trading above their 20 day moving averages (top chart) and above their 50-day averages (bottom chart).
In general, we can say that the intermediate-term trend is up when more than 50% of stocks are above their 20- and 50-day averages. The longer-term trend is up when over 50% of stocks are trading above their 200-day moving averages. When all three are above 50%, it has been very difficult to make money on the short side for anything more than short-term trades.
Pullbacks in the number of stocks trading above their 20- and 50-day averages to below 50% with the number of stocks trading above their 200-day averages greater than 50% have marked excellent intermediate-term buying opportunities. When those pullbacks occur at successively higher prices, we have a clear longer-term bull market.
Divergences between price and the number of stocks trading above their 20- and 50-day moving averages have marked recent intermediate-term tops in the market. While we've been seeing those divergences relative to the 20-day benchmark, we recently made a fresh peak in the number of stocks trading above their 50-day averages. Given that momentum--the number of stocks trading above their moving averages--tends to peak ahead of price, we can use the trajectories of these indicators to gauge the likelihood of market moves continuing vs. reversing.