Bouncing about the 50-Day Average

Have the last couple of weeks of trading been the start of a typical correction, or is it just a short-term pullback? Or, is what we’re seeing the start of the big, bad sell-off everyone fears? I think it’s much too early to tell for certain, but one way to monitor things objectively is to use the 50-day moving average.

The 50-day moving average is a great technical tool that can help you assess the short-term bias of the market. If we look at the chart below of the S&P 500 Index, we see that in January the index fell below its 50-day moving average (blue line) for the first time since November.

During the past week, we’ve seen the S&P 500 move back up toward the 50-day average, indicating that the recent selling in stocks may be over — at least in the very short term. In times like these, when the market is basically bouncing about its 50-day average, it is really important to keep a close eye on this indicator. By doing so, you’ll get a good read on which way this market wants to go.

My assessment here is that if this market fails to recapture the 50-day moving average during the next week or two, we could be looking at the possibility of a wider correction. But, if we move above the 50-day moving average in the next week or two, then we will just chalk up the January selling to profit taking and normal corrective action after the huge 2009 market run.

Whatever happens, the 50-day moving average will be the key to understanding the market’s bias, and understanding the ebb and flow of the equity markets is the first step toward making solid investment choices.