The 50-day moving average is a very commonly followed moving average. As such, it can be a nice mechanism for following trends. If the stock you are following is above its 50-day moving average, this can be considered bullish (and vice versa if the underyling is below that trendline).
I like to take my analysis a step further and check out what direction the trendline is moving to get an overall feel for how things are going. Of recent note on the S&P 500 Index (SPX) is the fact that its 50-day moving average recently turned lower after trending higher since November.
On the surface, I expected this to be a short-term bearish sign, but that isn't the case at all. In fact, since 2000, this has actually been a bullish event! As you can see below, the overall returns from a 50-day that is pointing lower after a month of trending higher actually beats the at-any-time returns across the board.
This reminded me of another study I did last month when the Russell 2000 Index MACD histogram turned negative. I expected that to be bearish, but like today's study ... it wasn't .
Two of the last three times this has happened, the move lower in the trendline has come within days of marking the eventual trading lows for that move. In other words, it's been a wonderful time to get very long.
On March 16, the SPX bottomed the exact day its 50-day turned lower. On November 23, the index bottomed two days later. With all of that said, the early June move lower (the red arrow in the chart below) happened right before a great deal of weakness over the coming months.
The uncertainty surrounding Greece and Europe continues to stranglehold any positive developments here in the U.S. Nonetheless, as Todd Salamone pointed out this week, there are still some reasons to not abandon the bullish camp just yet.
Lastly, let's look at things from a bigger picture. The SPX is down just 6% from its peak earlier this year and is still 24% above its early October lows. When you put it like that, one could argue this recent pullback is nothing more than a normal correction in the face of a huge first-quarter rally. Then factor in just how much negative sentiment there is toward the market here and should we ever have any good news out of Europe, there is more than enough skepticism to spark a huge rally.
Ryan Detrick, CMT, is our senior technical strategist. For more of his thoughts on the market, follow Ryan on Twitter.
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