Friday, the major stock market indices including the small-caps Russell 2000 ETF (IWM) and S&P 500 ETF (SPY) closed underneath their 50-day moving average.
However, on Monday, both reversed and ended the day above their 50-day moving average.
With Friday’s weak price action, any bearish traders who decided to short these indices based on a break of the 50-day moving average would now be underwater in their trades.
For this reason, we follow a simple rule to confirm price breaks under or over major moving averages.
The rule is to wait for the price to close for 2 consecutive days under/over the 50-day moving average.
Often price can temporarily dip or clear a pivotal moving average before reversing.
With that said, no trading rule is perfect, and you risk getting a subpar entry or sometimes completely missing the trade if there a large gap in price the next day.
However, in the long run, it will pay for itself as there are many times when price action will trap traders before running in the opposite direction.
Some quick tips to make the rule more powerful from a trading perspective would be to watch how strong the 2 closes are and if they stay near the 50-day moving average or continue to push away from it.
A second close near the moving average shows that price action could still be indecisive and therefore waiting for might be the next best plan.
This can help time your entries to make sure you do not get chopped or whipsawed in the market.
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Stock Market ETFs Analysis and Summary:
S&P 500 (SPY) Filled gap to 419.23. Support 414.70.
Russell 2000 (IWM) 221.13 support.
Dow (DIA) 332.68 support.
Nasdaq (QQQ) 342.80 pivotal area.
KRE (Regional Banks) 64 support.
SMH (Semiconductors) bounced off 244.77 the 50-DMA.
IYT (Transportation) 254.65 support.
IBB (Biotechnology) Needs to hold 159 area.
XRT (Retail) Did not confirm caution phase. 91.57 support.
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.