Right at the 50-DMA

The S&P 500 is currently battling with its 50-day moving average. For a brief period yesterday, the index fell below the 50-DMA, and we’re fighting it again today.

The current reading for the 50-DMA is 1177.31.

I’m not a big fan of technical analysis but I make an exception for the 50-DMA. It’s one of those dumb ideas that works for a really smart reason. The key is that the stock market is a momentum-driven data series. What happens yesterday impacts what happens today. Each day’s move is not independent of the day before.

What this means for investors is that once the market gets moving in one direction, the odds are very likely that it will continue in that direction. The turning point is just about impossible to know. Historically, however, once the market breaks its average close for the past 50 trading sessions, that is often a decent indicator. It’s not good, but it’s good enough.

Posted by on November 30th, 2010 at 10:26 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.