{"id":4209,"date":"2014-09-25T06:54:27","date_gmt":"2014-09-25T10:54:27","guid":{"rendered":"http:\/\/www.morpheustrading.com\/blog\/?p=4209"},"modified":"2022-04-06T15:05:03","modified_gmt":"2022-04-06T19:05:03","slug":"magnetic-50-moving-average","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/magnetic-50-moving-average\/","title":{"rendered":"The Magnetic Power Of The 50-Day Moving Average"},"content":{"rendered":"

\"Magnetic<\/a>Keeping the bears in check, stocks snapped back from a substantial, three-day losing streak yesterday. The NASDAQ Composite jumped 1.0%, the Dow advanced 0.9%, and the S&P 500 rose 0.8%.<\/p>\n

Most importantly, total volume ticked slightly higher in the NYSE and NASDAQ, enabling both exchanges to register a bullish “accumulation day” that was indicative of institutional buying.<\/p>\n

When the market opened yesterday morning, I said to subscribers in our Live Mentorship Room<\/a> that the S&P 500 would likely dip below (“undercut”) key support of its 50-day moving average before buyers stepped back in. That scenario played out exactly as anticipated.<\/p>\n

Within the first 20 minutes of trading, the S&P 500 had already undercut its 50-day moving average.<\/p>\n

But the buyers stepped in and quickly reversed the momentum, causing the S&P to pop back above that pivotal level within the first hour of trading, setting in motion a steady uptrend that persisted throughout the day.<\/p>\n

On the daily chart of the S&P 500 SPDR ($SPY) below, notice how the benchmark ETF probed just below its closely-watched 50-day moving average before reversing sharply higher:<\/p>\n

\"$SPY<\/p>\n

The reason I suggested the S&P 500 would likely undercut its 50-day moving average was that it is extremely common for the index to do so when it closes so near the exact level of the moving average the prior day.<\/p>\n

In this case, $SPY closed less than 0.2% above its 50-day moving average on Tuesday (September 23).<\/p>\n

As such, I said it seemed inevitable that banks, mutual funds, hedge funds, and other market-moving players would “shake out the weak hands” (cause traders\/investors with bad stop placement to sell their positions while the big boys scoop up those same shares).<\/p>\n

That’s how it played out yesterday, but what are the actual implications of yesterday’s shakeout and bullish reversal formation?<\/p>\n

Nice Shakeout, But Now What?<\/h2>\n

Overall, yesterday morning’s bullish reversal and subsequent trend day higher was definitely bullish.<\/p>\n

In fact, the shakeout below the 50-day MA with instant recovery was a positive sign for the health of the current rally.<\/p>\n

Nevertheless, the main stock market indexes may still oscillate in a sideways range for another week or two because a lot of overhead supply was created by the selloff of the past week.<\/p>\n

Although impatient traders may prefer stocks to quickly zoom back to new highs again, it is actually healthier for the current rally if the broad market takes a few more weeks to catch its breath.<\/p>\n

Practically every solid rally that “sticks” is preceded by the stock\/index first building a solid base of consolidation that generally spans around 5 to 8 weeks (stocks are presently on week 5 of the current base).<\/p>\n

A base-building pattern<\/a> is a bit like the foundation of a house; without it, your house will not be solid.<\/p>\n

Therefore, even though price action in the stock market may remain choppy and\/or stagnant while in consolidation mode, it is always preferable to the NASDAQ or S&P 500 rallying too long without a decent pause along the way (the inevitable price correction is usually much worse in the latter case).<\/p>\n

With yesterday’s “accumulation day,” we now expect new bullish swing trade setups to begin emerging in the coming days.<\/p>\n

When that occurs, we will be sure to alert subscribing members to new potential stock\/ETF trade entry details\u00a0in the “Watchlist” section of our stock picking newsletter<\/strong><\/a>.<\/p>\n