Stock Market Toolkit: The 50-Day Moving Average
The stock market’s big benchmarks fell below their 50-day moving averages this month, while many leading stocks also broke below those lines.
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It’s a good time for investors to wrap their heads around the importance of the 50-day moving average, a crucial tool used by institutional investors to move in and out of stocks, ETFs and commodities. This also makes it an influential level of support or resistance for stock market indexes.
On the charts at Investors.com and MarketSmith, the 50-day line (or the 10-week line, on a weekly chart) is a red line over the price bars. Don’t confuse that with the blue relative price strength line (traced in blue), or with the 200-day and 40-week moving averages, which are typically shown in black.
The 50-day line smooths out the price action. It tracks a running average of price closes over the past 50 trading sessions. On a weekly chart, the 10-week moving average is nearly the same, but averages closing prices over the prior 10 weeks.
The 50-Day Line: A Crucial Stock Market Tool
The 50-day line is a simple moving average, or SMA for short. This means it weighs all 50 closing prices equally. An exponential index, like the 21-day exponential moving average, places higher weighting on the most recent closing prices.
Institutional investors often use the 50-day line as a buy or sell boundary.
When a stock is rising and gets stopped at the line, it could be time to take profits. This type of action tells you the stock or index is meeting resistance. A stock that breaks above that resistance often extends its advance.
This was the case for Tesla (TSLA) back in June, when it climbed above the 10-week line above support in late June. The stock had fallen as much 40%, and the strong move above the line acted as an aggressive entry.
After a breakout from a base, leading stocks tend to trade above the 50-day and 10-week average. Often, they’ll pull back to the line and rebound from there. That creates a good opportunity to “buy on the dip.”
Investors should wait for a stock’s price to rebound in rising volume after a touchback to the 50-day line. This demonstrates that the stock is finding institutional support.
For example, InMode (INMD) broke out of a cup with handle base in June, and the next month pulled back to the 10-week line. The stock found support in a bullish reversal in higher volume, which added more than 100% to InMode’s advance.
A break below this level in heavy volume suggests at least some big investors are stepping back from the stock. This is usually a sell signal when it happens after a stock has been rising from a breakout.
Using The 50-Day To Gauge Indexes
These general guidelines also apply to stock market indexes. In addition, they work as a gauge for trading ETFs.
Moves sharply below 50-day support indicate stocks or indexes are headed to prior lows. This was the case with the Nasdaq, which made a sharp break of its 50-day line Wednesday. It was one factor in IBD’s decision to…