The 50 Day Moving Average

Today I wanted to discuss one of my favorite indicators for market sentiment as well as direction. Today I wanted to discuss one of my favorite indicators for market sentiment as well as direction. I usually separate the two topics but today I thought I would combine them because today the SPY which the ETF that tracks the S&P 500 index is right smack in the middle of hitting the 50 day moving average.

The reason the 50 day moving average is so important is because many Hedge fund managers and institutional traders rely on the 50 day moving average to make buying and selling decisions, so it's not that the indicator has some magic behind it, it's just an indicator that the majority of pro traders use and you will notice that sentiment tends to change when the index gets below the 50 day average.

In addition to the moving average on the broad market, I measure the number of stocks priced above 10 dollars that are currently either below or above the 50 day moving average. 

During the last 2 weeks the percentage dropped from 70% above the average to only 40% above the average and this is before today's drop, so I believe the number is now somewhere is the 50% range of stocks that are trading below the 50 day moving average.

Another very important sentiment change that we are seeing is the small caps trading well below the 50 day moving average, a few weeks ago I alerted everyone that options volatility was rising on the small caps, which meant traders were buying puts to protect their long positions. Since that time the Russell moved down steeper and will likely remain at these levels for some time.

There were other significant factors that I discuss in the premium membership areas, but this should give you some general ideas as to the current market environment.

Be prepared for lot's of back and forth range bound action that day traders thrive in, I doubt any major trends are going to be setting up over the next few months in the equity market.

The best way to take advantage of this market environment is through day trading techniques and very short term swing trading techniques.