Wednesday, June 21, 2006

A bounce

The markets had a pretty good day today with each of the major indices increasing almost 1%. As the day went on the markets got stronger, ending with a slight sell-off but maintaining the majority of its gains.

One of the technicals I do like to use is the 50 day moving average. I think it's a useful indicator to hightlight bottoms and tops when it comes to longer term trends and dealing with indexes. Many people do use 50day MA's with stocks, but I also find that overall the volatility adds some noise into the data. With an index there seems to be a general band that the stock trades within. I haven't had time to update my studies on this, but the last time I gathered data I remember that the S&P usually traded within +/- 3% of it's 50day MA. When it got past these extremes it was a signal that it was going to top/bottom out pretty soon. The Nasdaq is more volatile and I think the band for that was about +/-5.5%. In one of my earlier posts I noted that I was surprised the Nasdaq was over 7% below it's 50 day MA, which would be a strong signal that a bottom is near.
I don't have the exact 50day MA number with me, but it seems that the Naz is now under 5% from it's MA. The one thing that can skew this is that now we should expect the 50 day moving average to continue to decline because of the sharp sell-offs that just happened recently. But if the Nasdaq declines less than the 50 day MA decline, it would appear to get closer to -4% from it's moving average.
I'm getting caught up on work (finally!) so if I get a chance to update my sheets, I'll post some of the results.

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