Tuesday, July 27, 2010

The Nifty Fifty

Of the myriad of technical indicators available, moving averages have risen as not only one of the most popular, but also one of the most effective. Perhaps their popularity is due in part to their simple yet versatile nature. Traders can use them for anything from identifying trends and reversals to measuring momentum and crossovers. Though moving averages can be measured on any time frame, the 50 day moving average has become a staple for most chartist. Indeed, it comes default on most charting platforms and is often used to aid in identifying the intermediate trend of the market.

I suspect many traders (myself included) took note last Thursday as the SPY mustered the strength to breach its declining 50 MA. Those subscribing to the notion that the 50 MA provides quality signals no doubt used this breach as a clarion call to dispense with their bearish aspirations for the time being and perhaps dip their toes in the water on the long side.

As with any strategy or method of analysis, the proof is in the pudding. If breaking the 50 MA has provided profitable signals in the past, then directional traders ignore this signal at their own peril. Thus far the SPY has seen four different occurrences of breaking the 50 MA in 2010 - all of which proved fruitful.
[Source: MachTrader]

Admittedly, four signals is too small a sampling size to draw any meaningful conclusions. Suppose we looked at the performance of the 50 MA signal going back to 2000. With ten years of data and 70 plus crosses to learn from, we certainly have enough data to pass judgement on whether this moving average is all hype or worth observing.

I'll divulge my findings tomorrow. Stay tuned...


VanceH- said...

Hi Tyler, Can you elaborate on how you picked your 4 cross-over points? Before point 2 and 4 it looks like there were pretty clear cross-overs that you didn't highlight.


Tyler Craig said...

Great question Vance. When most traders use a signal like breaking a moving average or breaking a prior candle's high, they typically implement a price filter to reduce the chances of getting whipped in and out of the trade. So instead of immediately declaring a break of the 50 MA if the stock price breaches it by a mere $.01, I used a filter of around 1% (which is still quite tight IMO). Thus, the two times the stock price flirted with breaking the 50 MA (before 2 and 4), it never broke by a sufficient amount to call it a crossover.


Great post on nifty fifty.