Another Tool for Your Shed: Percent Above 200 Day Moving Average
- Posted by Greg Harmon
- on March 3rd, 2011
With the Bull’s and Bear’s debating each other over the future direction of the market the last week or so, finding great trade opportunities is getting harder. This makes it a good time to shift from the daily task of taking the vital signs of the market to a broader set of exams, more like a monthly checkup. When I do this one of the indicators I look at to confirm the mood is the percentage of S&P 500 stocks that are over their 200 day Simple Moving Averages. Below is a weekly chart of this indicator over the last 7 years with a chart of the S&P 500 Index below it for comparison.
This indicator acts like an oscillator in some ways. It will move between 0 and 100 and becomes more difficult to advance in either direction as it gets toward extremes. It also has an inherent bias to the upper part of the range in a bullish market and the lower part in a bearish market. It can be seen that it moves around a lot, even in a trending market. Look at the channel between 45 and 85 with 8 different moves during the rising market from 2004 to 2007. But it is an imperfect indicator, sometimes leading and sometimes lagging. Notice that as it broke from the highs in mid 2007 the S&P 500 did not follow for for several months. Also as the indicator bottomed in late 2008 the market continued lower and started rising before the indicator. Clearly this is not an indicator for a day trader. But looking at the peaks in the Relative Strength Index (RSI) of the indicator tells a different story. Whenever the RSI has either hit the technically over bought or oversold levels, 70 and 30, or moved with a steep slope, it has presaged a move in the S&P.
So what does it tell me now? Although the indicator is very close to the extreme, currently at 90.80, it has been higher. Also it has not touched an RSI of 70 and does not look to be making a steep move lower. This would indicate that the current pullback will be limited, unless this changes. This indicator should not be used by itself, but it can be a good addition to your tool box. With a moderate time horizon it can help drown out some noise.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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