Wednesday, April 09, 2008

Nasdaq 200-day MA vs 50-day MAs

The relationship between the number of stocks trading above the 200-day and 50-day MAs describes the internal health of an index. It is not an ideal indicator, with obvious spikes not necessarily correlating to inflections in the market. This is especially true for spike highs where the number of stocks trading above the 200-day MA is greater the number above the 50-day MA - a situation associated with an overbought market. It is not uncommon to see such spikes occur during a well established decline (and in the case of 2002 spike highs, near the end of the decline).

The ratio smooths into a more rounded bottom when the number of stocks above the 50-day MA is greater than the number above the 200-day MA. This situation is a little more helpful in pin-pointing bottoms, especially when the ratio shows twice as many stocks above the 50-day MA than 200-day MA (i.e. a ratio of 0.50 or less).

Currently there are just over twice as many Nasdaq stocks above their 50-day MA than 200-day MA (0.47) which favors higher prices over the next 6-months (when the next spike high can be expected). It is by no means a perfect indicator, but from a long term perspective there is definite value to be found for buyers at this time.