When the markets sold off last week they surrendered their 50 day simple moving averages for the first time since October 10th. Many technical traders follow the 50 day sma very closely with the simple thesis that a stock/index below its 50 day sma is bearish and a stock above its 50 day sma is bullish. So when the markets broke below this key average last week, alot of traders likely were either stopped out or got short. No matter what they did, the fact the indexes are below their 50 day sma’s is psychologically bearish.
With yesterday’s rally the major market indexes we follow (Russell 2000, Midcap 400, S&P500, NASDAQ, and Dow Industrials), are now within reach of their 50 day sma’s. Should there be more to this rally than an oversold pop, the indexes will be able to sustain a trend above this key average. On SPX that level is 1,205; RUT the 50 day sma is at 701; MID is at 845; NASDAQ is at 2,584; and the Dow is at 11,537. We’ll also throw the German Dax Composite in there as it is on its way back up towards its 50 day sma which is currently at 5,773.
The final thing to note is the slope of the 50 day sma on all of these averages. A quick glance at their charts shows that the 50 day sma is starting to slope downwards after sloping upwards since the middle of October. The last time the 50 day sma on all of these indexes started to slope downwards at the same time was in early June. While all of the indexes were able to rally back above their 50 day sma’s in July, the slopes never curled over and started uptrending. Then as we moved into August, the markets sold off sharply. So be on the look out for a rally above this key moving average that doesn’t see the average curl over and start trending north as it could be prove ominous.
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