The most important trend-following tool for growth stock investors is the simple 50-day moving average. You should own growth stocks that are in uptrends above it, and you should welcome opportunities to buy when those stocks correct down to that 50-day moving average. (It’s usually best if that average is rising.)
The 200-day moving average, by contrast, is of little use for long stretches of time - like most of 2021 and 2022. In long bull markets, stocks can trade well above their 200-day moving average for more than a year.
But in major corrections—and even bear markets—the 200-day moving average can be the most valuable moving average of all. That’s because just when all the news seems darkest—just when investors begin to feel that all is lost, as they have for the better part of a month now, and much longer than that for growth stock investors—the 200-day moving average pipes up and says, “Hey, this looks like a terrible time to sell; perhaps you should think about buying!”
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They say a picture is worth a thousand words, so let’s take a look at the following stock charts.
The 200-Day Moving Average, in Six Charts
The Dow Industrials
The S&P Midcap (MDY)
The S&P 600 (Small Cap)
The NYSE Composite
The S&P 500 (Large Caps)
The Nasdaq Composite (Growth Stocks)
So, that’s pretty definitive. All six of these major indexes traded above their 200-day moving averages to start 2023, and those that have tested them recently have found support and a solid bounce so far. The S&P 500, specifically, tested its 200-day without breaching it, while the Nasdaq actually traded above its 200-day for the month of February before briefly breaching it and then breaking higher. Conditions, undoubtedly, remain difficult, with inflation staying stubbornly high, the Fed loudly signaling their commitment to higher rates as long as it takes (higher for longer) and tough credit conditions on all fronts.
But for all the negative headlines and bearish sentiment, the technical price action is painting a rosier picture than it has in many months and, in fact, recently triggered a few of our favorite indicators. That’s not to say we’ve entered a new raging bull market, but it does offer a green light to increase equity exposure while managing risks via position sizing, stops, or adherence to your trading system of choice.
Do you use the 200-moving average as a measuring stick in your investing? Or do you use other forms of technical analysis? Tell us about them in the comments below.
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