Moving Averages – To Use Or Not To Use?
October 22, 2012
The SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 Index (SPX), pulled back to its 50-day moving average at the end of the past couple of weeks. Many traders closely follow moving-averages and view them as support when a stock pulls back to one. Others disregard moving-averages completely.
Below is a chart of SPY with its 50-day moving-average. Some simple criteria are used, as well as making a rule that signaled pullbacks to the moving-average. For example, the SPY had to be trading above the moving-average for two months and then get within 1% of the moving-average. Those signals are marked on the chart below, which goes back to 2010.
So does the moving average mean anything? Of course, there's no way to say for sure, because randomness can cause figures to be skewed one way or the other. But since 2000, after a pullback to the 50-day moving average (as defined in these terms), the SPY averages a 0.36% return over the next month and is positive 67% of the time in 12 signals. Typically, the SPY has been up 0.25% and positive 60% of the time over the same period, so there is some out-performance.
The Best Moving-Average
Different traders watch different moving-averages based on a lot of different criteria. To try to solve the problem of which moving-average provides the best support for stocks a criteria similar to what is described above for the SPY is used -- the numbers are run for all stocks since 2010 using multiple moving-averages -- then, the one-month returns are found after a signal and are summarized.
Below is a table of the results, where you'll see the average, median and percent positive of the returns. The last two columns show the percentage of the time the stock bounced off the moving-average to gain at least 5% within a month of the signal. The second column is when the stock fell right through the moving-average and lost at least 5% within a month.
The 50-day moving-average has, in fact, been pretty positive for stocks. That trendline shows the best average return, along with the highest percentage of stocks bouncing for a big gain and the lowest percentage of stocks that fell through the moving average. Meanwhile, based on the data below, the 150-day moving-average doesn't seem like very solid support.
The Most Reliable Moving-Average
The table below summarizes the data for 2012 only for the most reliable moving-average support this year. The 50-day still looks to have been pretty good support, with stocks averaging a 0.77% return over the next month after pulling back to the moving-average. The 200-day moving-average also looks like it has been reliable.
Finally, below are the stocks that signaled at the end of last week by pulling back to either the 50-day or 200-day moving-average. However, do not blindly buy these names, since there are a lot of variables to consider before making a trade. In fact, Omnicom Group (OMC) fell through its 200-day moving-average on Friday, and is now trading well below it.
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