Why Moving Averages Matter

by Geoff Garbacz | 03/06/2021 12:13 PM
Why Moving Averages Matter

What is a moving average? It tracks the average price over a period of time. Tracking moving averages lets you see if there are net buyers or sellers over a certain period of time. In The Daily Briefing each morning we track the 5, 10, 20, 50 and 200 day moving averages. Why these periods?

Pretty simple. 5 equals one week. 10 equals two weeks. 20 equals four weeks or a month. 50 equals 10 week or slightly less than three months or a quarter. The longest duration is 200 days which equals 40 weeks roughly give or take a few holidays. A year equals 52 week so 40 weeks equates to almost 9 months.

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Tracking these lets us see how much volatility there is if you create a confidence score on the positive and negative weeks.Each morning we track the moving averages of the Dow Jones Industrial Average, S&P 500, Russell 2000, S&P 100, S&P 400 Mid Cap Index and the NASDAQ 100. This week our confidence scores were very volatile. From Monday through Friday the scores were as follows 90%, 57%, 33%, 27% and 53% on Friday.

Looking at this sequence, one can observe that stocks struggled from Monday onward but then recovered on Friday. If we look at the S&P 500, Monday gained 2.38% then Tuesday through Thursday saw the index lose -3.42% before gaining 1.95%. The week's return was a gain of 0.81%. Other indexes fared worse.

Using the daily indexes as a guide, we can see that all is not well however as the confidence index fell from 90% to 53%. It appears there could be more damage ahead unless the assorted moving averages we track on the major indexes recover. A break next week again of the 50 day moving averages would be more problematic.

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