Did The 50-Day Moving Average Stop The Bleed?


After 2 major sell-off days, the market bounced late Friday off the 50-day moving average.


First, why do we care about the 50-day moving average?

The most common inputs for the Moving Average used by traders and market analysts are the 50, 100, and the 200 DMA.

Knowing a large amount of people and institutions watch these levels, makes for a self-fulfilling prophecy when price reacts to these averages.

While there are plenty of times moving averages are broken and phases change as a result, Friday’s test of the 50-DMA in many instruments has weight.

Here we have the QQQ (Nasdaq) and the IWM (Russel 2000) both pulling back after Thursday and Friday’s large sell-off.

While IWM touched the 50 and the QQQs only came close, I use the 50 DMA price more as a range looking for confirmation over the course of two days.

If the QQQs and IWM hold Friday’s low, we not only had a perfect 10% correction, but we also did not see a phase change from bullish to caution.

Now if these symbols are not making enough of a convincing point then let us look further!

Here we have JNK and SHM. JNK represents high yield debt.

It is the riskier type of debt that might keep you up at night. Even so, look at how high it has gone. More importantly, it never crashed with the market, holding up way better.

Apparently, there is still good appetite for buying Junk.

Now SMH almost perfectly touched the 50 and bounced off of it to close near where the day opened.

With the great rise in tech stocks since 2012, SMH (semiconductors) has been a good one to keep eyes on.

With these major symbols coming so close to the 50 DMA and finding buyers and support, they have created a good sense of what we should look for next week depending on if they hold or break through the moving averages.

Watch for the 50-DMA to become a place of support with an expectation that the markets will move higher.

Or, watch to see if we head back towards the 50-DMA for a potential break and a larger correction in the market.

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