The Trend Is Your Friend

Last week’s big gains were encouraging for stock investors, but the more important news may have come in the last two days. Four major domestic equity benchmarks (Dow Industrials, S&P 500, Nasdaq Composite, and Russell 2000) are now in intermediate-term uptrends, as measured by the 50-day moving average. This is something we haven’t seen in several months. Here is a chart of the S&P 500 to illustrate:

Why do we care about moving average? They are used to filter out daily noise and indicate the market’s general trend. Market technicians all have their own preferences, but generally the 20, 50, and 200 day moving averages are considered indicative of short-term, intermediate-term, and long-term trends. When the index is above the moving average line, it is said to be in an uptrend. This is important information if your goal is to trade with the trend.

There’s no guarantee this condition will last, of course. One or two bad days could easily push the indexes back into downtrend territory. Moreover, the same benchmarks are still in long-term downtrends despite the recent gains. Certain individual sectors still look very weak. On the other hand, some sectors are strengthening and could soon start to look very attractive to trend-following traders. The trick is to identify those sectors and buy them at the right time.