Last December when the S&P slipped above the 50-days MA, many pros were utterly excited, they were calling market bottoming and suggested to started "bottom-fishing". Now, lets take a closer look into this subject.
Based on this chart, one might be tempted to conclude that there is a predictive value when price touches its moving average, as each time it has (over the past 6 months), a lower low ensued. The problem arises when you stretch the time horizon beyond the recent past.
Above is the S&P500 covering the past 2 years.
As can be plainly seen, price has criss-crossed its MA on numerous occasions, producing no clear pattern for which an investor can exploit.
The weakness in using the 50-day MA on its own is further demonstrated when you use the simple moving average (price of the past 50 days divided by 50), as opposed to the above-exponential moving average (price of the past 50 days weighted more heavily toward the most recent days). In the above chart, the simple 50-day MA shows an equal, if not greater, lack of predictive value, as price criss-crosses its 50-day MA with regularity.
As the above charts show, the 50-day MA, be it simple or exponential, has no consistent predictive value in relation to its price alone. In my experience, the only consistent, predictive value of it is when it's used in the context of the Mega Trend.
Moving averages are terrific tools, if used properly. On its own, however, the 50-day MA shows itself to have little predictive value. So, please, no more reporter calls and emails on this subject.
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