The ability of a stock to be above its 200-day moving average can be considered a fairly reliable indicator for positive future returns.
A breadth indicator that measures the percentage of stocks above a specific moving average. Many indicators have been created on the concept of market breadth. For example, a good market breadth indicator is $SPXA200R which measures:
$SPXA200R is a medium to long-term indicator. In general, you can use it to:
In addition to look at $SPXA200R, 200-day moving average (DMA) can be also used in different ways. For example, you can look at:[1]
A breadth indicator that measures the percentage of stocks above a specific moving average. Many indicators have been created on the concept of market breadth. For example, a good market breadth indicator is $SPXA200R which measures:
The percentage of S&P 500 stocks above their 200-day moving averages
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| Figure 1 |
Interpretation of $SPXA200R
$SPXA200R is a medium to long-term indicator. In general, you can use it to:
- Buy - when it moves above 30% from below and
- Sell - when it moves below 70% from above
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| Figure 2. Major corrections have been marked by extended time below the 50% level of $SPXA200R (Source: @DKellerCMT) |
More on 200-DMA
In addition to look at $SPXA200R, 200-day moving average (DMA) can be also used in different ways. For example, you can look at:[1]
The direction of 200-DMA
- If it's rising, it's a signal of a long-term uptrend, and vice versa for a downward-sloping 200-DMA
- In [2], the author has proposed below trading strategy which could potentially produce an annual return of 8.55% :
- The system only buys the SPDR S&P 500 when it’s in an uptrend, and it remains in cash when the ETF is in a downtrend.
- The system makes any buy or sell decisions every 4 weeks, so trading expenses should be negligible.
- The market is considered to be in:
- An uptrend if the slope in the 200-day moving average in the SPDR S&P 500 is positive in the past 10 days.
- goog_98465206An downtrend if the slope in the 200-day moving average in the SPDR S&P 500 is negative in the past 10 days
The distance of a stock is trading above or below its 200-day
- A good way to gauge how extended it is from its "normal" trading range
- Especially vulnerable are stocks that are trading far above their 200-day moving average. For example, on 05/31/2017, Apple (NASDAQ:AAPL) is 22.80% above its 200-day, Amazon.com (NASDAQ:AMZN) is at 20.39%, and Alphabet (GOOGL) is at 19.05%.
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