Technical Basics: Average Is Good
18-Dec-02 09:29 ET
[BRIEFING.COM - Jim Schroeder] In school average just didn't cut it and now as a parent average means it's time to start buckling down on the homework front. However, from a chart perspective average, as in moving average, can be pretty darn good.
The Averages
During a well established uptrend the stock market averages have shown a tendency to maintain a posture above the 20 day ema and during a downtrend they will remain below. This provides the investor with a simple method for gauge the near term trend. Keeping this in mind when establishing positions (the wind at your back theory) not surprisingly increases the probability of the trade moving in your favor.
The example above, which hopefully is not too painful to look at, is the final months of the great bull market in the Nasdaq Composite. Note that it generally followed the 20 day ema (blue line) with no damage done to the overall trend while the 50 day sma (red line) remained intact. The second chart below illustrates the other side of the mountain as the index firmly established the bear trend.
Longer Term Time Frame
For a little perspective we thought it worth a quick peak at the entire decline off of the March 2000 high on a weekly basis. Note below that while the advance over the last two months was impressive indeed based on the percentage gained off the low, it has merely turned the weekly bias neutral as the index vacillates near its 20 week ema. Although the index was able to take out the 50 wk early this year, the roughly 5% push above clearly did not alter the trend.
Where Are We Now?
From a daily perspective below we can see that the short term bias is neutral (below 20 day ema) but the intermediate term trend is still positive (above the 50 day). Keep in mind, as highlighted in a Stock Brief from Oct 30, we have found during the previous recovery attempts since the March 2000 high that if the index puts together two closes back below the 50 day sma after an upside penetration, the underlying negative bias has resumed control.
Not wanting to focus in on only the negative historical aspect to following the averages, we reviewed the action during the long term uptrend from the view that perhaps a new uptrend has indeed taken control. Two closes below during the long term uptrend did not alter the longer term bull bias but it did result in fresh pullback lows for the correction that was underway at the time.
Conclusion
The Nasdaq Composite has put together an impressive percentage rebound with the majority arguing that while the market may struggle near term, the bottom is now in place. Based on the previous performance vs the averages on the daily chart, we will be closely eyeing the 50 day sma during the current slide off the Dec high. We do not suggest basing decisions solely on the activity of the market at moving averages but it is clear that at least being aware of the posture of the market in relation to the averages has helped in determining the overall trend.
If you have any comments, questions or suggestions send them to Jim Schroeder |
