Stocks and Moving Averages

By Lawrence G. McMillan

An indicator that doesn’t get a lot of attention is how many stocks are above or below their moving averages.  In this article, we’re going to take a look at that indicator, using several different moving averages.  Clearly, such an indicator is just another way of discerning whether the market is overbought or oversold (or is not).  Does this give a better or complementary picture to the indicators that we already use for these purposes, which largely are market breadth and put-call ratios?  I don’t think we can say that this indicator is better, although at times it might be, but it is certainly complementary.  For example, it can offer confirmation of an overbought condition that has already been highlighted by market breadth, but if it doesn’t confirm, that can be important, too.

Creation of “The Study”

In order to try to make some sense of this indicator, we analyzed what percentage of stocks were above the following moving averages: 20-day, 50-day, 100-day, and 200-day.  Since we have data going back to 1990, we took the study all the way back to then – nearly 22 years in all.  

The data regarding the short-term moving averages (20-day and 50-day) are probably more useful to short-term traders, but they swing back and forth so quickly – especially the 20-day – that it looks like noise from a larger viewpoint.  The 100-day and 200-day moving averages, though, give fewer signals and thus are more applicable for intermediate-term position traders.  The put-call ratios, for example, are intermediate-term indicators as well, so these should theoretically be complementary indicators...

Read the entire Stocks and Moving Averages article (published on 1/27/12) by subscribing to The Option Strategist Newsletter.