I am a believer in long-term trends. Today we'll consider an
indicator that often proves very useful for detecting such
patterns: the 500-day moving average.
Like the wind, stocks move in a specific direction. The reason
for this movement is not always clear. Maybe there's higher air
pressure over the sea than over the plains. Maybe more investors
want to own a stock than want to sell it.
When engineers want to track the movement of air, like in a wind
tunnel, they use plumes of smoke. And when traders want to
identify trends, we use moving averages.
Most people are familiar with averages such as the 50-day or
200-day, which can also be powerful indicators. The 500-day
tracks much longer-term trends and is especially useful in
today's market because the crashes of 2008 and 2011 continue to
reverberate on many charts.
Stocks can appear ready for a decent move, but then stall or
reverse. This kind of price action often make no sense until you
add the 500-day to your chart.
, which looked bullish in April 2010 as its 50- and 200-day
moving averages were both climbing, but then the 500-day came
crashing down like an eagle on a prairie dog. TEX also surged
higher this year on strong earnings growth. It hit the 500-day in
mid-February and has been trading on either side of it since.
Another recent example was
, which rallied violently in January and February before tanking
at the 500-day (orange line on chart below).
It also works on the long side, as we see with
. The e-commerce giant has been trending higher since late 2008,
but started breaking down in November. Some folks thought it was
ready to collapse after the shares slipped below their 200-day,
but the 500-day emerged as support. At this point, AMZN could go
either way. The key point is that the 500-day is an important
level to watch. Stocks seldom go straight through it without at
least a pause.
Now, don't think that moving averages are some kind of black
magic or like cosmic rays shooting down from the heavens. They
should always be understood for what they are: tangible
representations of processes that are inherently intangible, like
the spread of specific products or the deterioration of an
industry. Moving averages simply reveal these bigger economic and
societal processes over different time periods.
Finally, let's consider a few more stocks where the 500-day is
now potentially important.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of April 25.
Chart courtesy of
Lender Processing Services
(LPS): Rallied back hard from a big selloff and now is looking
vulnerable again as it hits the 500-day and potential
resistance from October 2010.
New York & Co.
(NWY): Also hitting resistance at its 500-day and the same
level where it gapped lower in August. Looks as if it will drop
or at least pause.
(ZION): Was stuck at the 500-day before Monday's weak earnings
report. It fell on that news and looks like dead money into the
(LPX): Has been finding support above its 500-day day and
making higher lows. Given its ties to the improving
home-building industry, this one looks bullish.