Investors use two ways to determine the direction of the markets.
1. Fundamental analysis maintains that markets may misprice a security in the short run but that the “correct” price will eventually be reached. Profits can be made by purchasing the mispriced security and then waiting for the market to recognize its “mistake” and reprice the security.
2. Technical analysis maintains that all information is reflected already in the stock price. Trends ‘are your friend’ and sentiment changes predate and predict trend changes. Investors’ emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the ‘value’ of a stock is. Their price predictions are only extrapolations from historical price patterns.
The chart below is of the S&P 500 index for the last 6 months. The Green line is the 50 Day moving average of the index. Many analysts who use Technical analysis to follow the market look at this line to determine the trend of the market. When the index stays above the line the market should continue its positive trend, when it falls below it may signal a deeper correction.
The market has come down to the 50 day moving average 3 times this year including yesterday and each time resumed its upward trend.
Stay tuned to see if Thursday’s “bounce” off the moving average can hold and the market can continue its upward trend…