business newsWhich Moving Average Is the Best Support?
By
Schaeffer's Investment Research
Oct 22, 2012 11:05 am
Fifty-day? 200-day? Here, an attempt to solve the problem of which moving average provides the best support for stocks.
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Foreword: The SPDR S&P 500 ETF Trust (SPY) (NYSEARCA:SPY), which tracks the S&P 500 Index (INDEXSP:.INX), pulled back to its 50-day moving average at the end of the past couple of weeks. Many traders closely follow moving averages and view them as support when a stock pulls back to one. Others disregard moving averages completely.
Below is a chart of SPY with its 50-day moving average. Using some simple criteria, I made a rule that signaled pullbacks to the moving average. For example, the SPY had to be trading above the moving average for two months and then get within 1% of the moving average. I marked those signals on the chart below, which goes back to 2010. So does the moving average mean anything? Of course, there's no way to say for sure, because randomness can cause figures to be skewed one way or the other. But since 2000, after a pullback to the 50-day moving average (as defined in these terms), the SPY averages a 0.36% return over the next month and is positive 67% of the time in 12 signals. Typically, the SPY has been up 0.25% and positive 60% of the time over the same period, so there is some outperformance.
Solving the Moving-Average Debate: Different traders watch different moving averages based on a lot of different criteria. I attempt here to solve the problem of which moving average provides the best support for stocks. I used criteria similar to what is described above for the SPY, and ran the numbers for all stocks since 2010 using multiple moving averages. Then, I found the one-month returns after a signal and summarized them.
Below is a chart of SPY with its 50-day moving average. Using some simple criteria, I made a rule that signaled pullbacks to the moving average. For example, the SPY had to be trading above the moving average for two months and then get within 1% of the moving average. I marked those signals on the chart below, which goes back to 2010. So does the moving average mean anything? Of course, there's no way to say for sure, because randomness can cause figures to be skewed one way or the other. But since 2000, after a pullback to the 50-day moving average (as defined in these terms), the SPY averages a 0.36% return over the next month and is positive 67% of the time in 12 signals. Typically, the SPY has been up 0.25% and positive 60% of the time over the same period, so there is some outperformance.
Solving the Moving-Average Debate: Different traders watch different moving averages based on a lot of different criteria. I attempt here to solve the problem of which moving average provides the best support for stocks. I used criteria similar to what is described above for the SPY, and ran the numbers for all stocks since 2010 using multiple moving averages. Then, I found the one-month returns after a signal and summarized them.
No positions in stocks mentioned.
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