The most important trend-following tool for growth stock investors is the simple 50-day moving average. You should own growth stocks that are in uptrends above it, and you should welcome opportunities to buy when those stocks correct down to that 50-day moving average. (It’s usually best if that average is rising.)
The 200-day moving average, by contrast, is of little use for long stretches of time. In long bull markets, stocks can trade well above their 200-day moving average for more than a year.
But in major corrections—and even bear markets—the 200-day moving average can be the most valuable moving average of all. That’s because just when all the news seems darkest—just when investors begin to feel that all is lost—the 200-day moving average pipes up and says, “Hey, this looks like a terrible time to sell; perhaps you should think about buying!”
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They say a picture is worth a thousand words, so let’s take a look at the following stock charts.
The 200-Day Moving Average, in Six Charts
The Dow Industrials
The S&P Midcap (MDY)
The S&P 600 (Small Cap)
The NYSE Composite
The S&P 500 (Large Caps)
The Nasdaq Composite (Growth Stocks)
As you can see in the charts above, the selling pressures from mid-July have almost entirely evaporated.
Each of the six indexes above dipped below their 50-day moving averages and have since bounced back above them (although the Nasdaq is close).
In fact, other than the mega-cap-heavy S&P and Nasdaq, none of the broader indexes even approached their 200-day lines. (And even those saw their declines halted before it really came into play).
While it’s too early to call the correction “over” (we’ll need to see stocks start hitting higher highs again for that), this recent bout of selling, much like April, looks like a much-needed breather more than anything else.
So, for now, we’ll be keeping an eye on our favorite indicators, looking for a green light to increase equity exposure while managing risks via position sizing and stops.
Do you use the 200-moving average as a measuring stick in your investing? Or do you use other forms of technical analysis? Tell us about them in the comments below.
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