The 50-Day Moving Average Has Bulls Feeling Confident

Stocks are trading flat this morning as investors digest the recent tech slump. The Dow, S&P, and Nasdaq Composite all started higher on the day before dipping lower by noon.

Overall, it seems neither bulls nor bears are fully in control.

Even in Big Tech, where many analysts expected a quick rebound, the top stocks are chopping sideways. Apple (NASDAQ: AAPL) shares initially jumped to a 2.7% gain but now are down 0.15%. Netflix (NASDAQ: NFLX) and Microsoft (NASDAQ: MSFT) have also dropped slightly.

If the tech sector can recover to finish out the week, a larger correction is likely to be avoided.

Still, investors and analysts alike remain worried that the market could be “stuck” near key support.

“Wednesday witnessed a partial recovery […] but we do believe that the switchback ride of the last 5 weeks will have placed at least a temporary cap on the powerful advance that has taken place since March,” said Michael Shaoul, chairman and CEO of Marketfield Asset Management.

“This is not to say that the damage is irreversible, particularly if key support at the 50‐day moving average manages to hold in the coming sessions, but it will probably take a few weeks before the September 2nd high can be fully tested or surpassed.”

The 50-day moving average (50-SMA) – one of the most important trend indicators used by traders – often serves as the first line of support in an uptrend or the first line of resistance in a downtrend. For that reason, and the close proximity of the major indexes to the 50-SMA, analysts are currently transfixed on it.

The S&P 500 (as represented by the SPY in the chart above) is still trading above the 50-SMA. The Dow is as well.

And even though the tech-heavy Nasdaq Composite got hammered by a rapid sell-off, it too is above the 50-SMA after dipping below it temporarily on Tuesday.

That means, from a purely technical standpoint, the rally’s not dead quite yet. To Liz Young, director of market strategy at BNY Investment Management, it’s also reason enough to stay long on equities.

“People go to cash in droves — and it’s immediate, it’s a big wave. They come back in drips. So, as it drips back in, that cash is going to look for more attractive valuation opportunities. So I think it’s natural that it would look for things that have been a little more beaten down or some of the stocks that haven’t driven us up to this point,” Young said.

“But I don’t think we’re in a place now where you have to start selling rallies and taking exposure off the table.”

The headline for stocks is “down, but not out.” A broader correction could certainly be in the works, but for the time being, bulls are safe.

Even though the indexes are sitting dangerously close to the 50-SMA – a “sell here” line respected by scores of experienced traders.


Please enter your comment!
Please enter your name here