50 day moving average PNRA, FFIV, EL

Today we should discuss moving averages. You have to remember that even though the stock market has been in an uptrend since March we have had many instances of short sharp down turns which tempt people to sell their holdings. It is a good idea to look at the major indexes such as the Dow, Nasdaq and S&P to determine the overall health of the market and decide whether to make a purchase. Once you have a purchase ignore the major indexes and just follow the individual stocks you own managing each position in isolation. If the Dow is falling but your stock is holding steady or rising then you have no reason to sell.


A very good indicator as to the health of the market or an individual stock is the 50 day moving average. This is a way of smoothing out all bumps in the price so you can focus on what the trend really is. The 50 day moving is calculated by taking the closing price of a stock or index for the last 50 days and adding them together then divide the result by 50. Each day you add the latest number and drop off the oldest number and recalculate. Luckily for us most stock chart services offer the 50 day average as a line you can plot on the stock or index you wish to study. Take a look at the Dow Jones 1 year graph below and its 50 day moving average which has been plotted, courtesy of http://www.bigcharts.com/.

Notice how since March when price crossed over the index the 50 day moving average has made a steady climb upwards. Also notice how the Dow index mostly trades above that smooth line. As long as that holds you generally should consider the upward trend has not changed. Notice how many times the Dow index has approached the 50 day moving average line only to jump up again and often on increased volume. In fact if you are considering a purchase the best time to buy is as the Dow approaches that line and jumps up from it. This usually indicates that support has been found at this level. Some time back we spoke about support and resistance levels using channels. The 50 day moving average also often acts as a support line as the index or stock rises. Each time it gets close to the 50 day average it bounces up off it. In a downtrend the index or stock will trace below the 50 day moving average line and stay below it until the trend changes (this can be seen at the very start of the chart). In a down trend the average acts as a resistance line and every time the index or stock approaches that line it usually reacts back down again as the downtrend continues. The indication of a trend changes is when the stock or index breaks through that moving average line preferably on increased volume. Of course this does not work 100% of the time but is a great indication that works most of the time. Occasionally a stock in an uptrend might briefly fall below the moving average on low volume only to follow that line before it moves back up again.

Remember investing is an art not a science, nothing is guaranteed. It is all about “odds favor” and that’s why we have to build positions gradually rather than make large outright purchases.

Look at the same chart below over the last 6 months.

Price has approached the moving average again as we had on many previous occasions (see in circles). We are at a very strategic point in the recent uptrend. We are currently testing the moving average on increased volume. This is not a good sign and the buyer of new positions should hold off and watch the action over the next few days. If it bounces up then the uptrend is reconfirmed at this critical juncture. If the index collapses through the 50 day average on volume then we can consider a trend change of unknown size and duration. When we are in a down trend I will talk later about what to watch for to identify a new uptrend.

Now let’s identify some stocks breaking out to be added to our watch list for possible future purchase (assuming we don’t enter a down trend in the averages). The stocks below have all shown breakouts on good volume even in spite of the bad market today.

PNRA - $73.41

FFIV - $54.61

EL - $53.63