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.
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3 comments:

Dave said...

Comparing the 20-50-200 day moving averages to find a short/int/long-term trend makes sense.

I don't understand how to use this to find tops in the market; I'm specifically confused how to compare "divergences between price and the number of stocks trading above their... averages."

It seems strange to compare price with % of stocks.

Candy said...

Thx, Brett...what is the symbol for the 200 Day MA, please?

ffbd said...

Where can i find a website that shows charts stocks above or below there 10, 20 , and 50 day moving average.
For divergence on a daily and weekly basis.