50-Day Moving Average Useless On Its Own
But a terrific tool if used in proper context.
Every now and then I get a phone call or email from a reporter asking my views about a market metric that receives what I believe to be an undue amount of investor attention: the 50-day moving average (or MA).
The calls and emails usually occur right around the time when price approaches (from below or above) or oscillates around its 50-day moving average. Such is the current case with the S&P 500 and its 50-day MA.
As the first chart shows, over the past 6 months, price has touched its 50-day MA:
Based on this chart, one might be tempted to conclude that there is a predictive value when price touches its moving average, as each time it has (over the past 6 months), a lower low ensued. The problem arises when you stretch the time horizon beyond the recent past.
Here's a chart on the same S&P 500 covering the past 2 years:
As can be plainly seen, price has criss-crossed its MA on numerous occasions, producing no clear pattern for which an investor can exploit.
The weakness in using the 50-day MA on its own is further demonstrated when you use the simple moving average (price of the past 50 days divided by 50), as opposed to the above-exponential moving average (price of the past 50 days weighted more heavily toward the most recent days). In the following chart, the simple 50-day MA shows an equal, if not greater, lack of predictive value, as price criss-crosses its 50-day MA with regularity:
Investment Strategy Implications
As the above charts show, the 50-day MA, be it simple or exponential, has no consistent predictive value in relation to its price alone. In my experience, the only consistent, predictive value of it is when it's used in the context of the Mega Trend, which I first wrote about on October 2, 2008. I encourage you to revisit the posting to understand how the 50-day MA can be used to great investment effect.
Moving averages are terrific tools, if used properly. On its own, however, the 50-day MA shows itself to have little predictive value. So, please, no more reporter calls and emails on this subject.
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