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One of the most simple measures of market internals is the percentage of stocks above their moving average. Any moving average can be used, although the most common are the 50 and 150 simple daily.
This is a useful metric because as stocks move above and below their moving averages, they get stretched away from the average basis that traders or investors entered at. By looking at this you get an idea of how ‘healthy’ a market.
But it can also shows you important inflection points in the market. For example, when almost all stocks in a market are below their 50 day moving average, you can bet that a snap back rally is not too far away.
Some time ago, I was experimenting with this and I stumbled on a new way of looking at this metric. I haven’t found anyone else using the % above MA in this way. But then again, its quite possible that another chart junkie, hidden away somewhere, had already discovered this.
So what is it? Well, instead of simply looking at the percentage of stocks above a moving average, I look at a ratio of two.
One short term (50 day MA) and the other long term (200 day MA). And I divide the former by the latter. Here’s what it looks like for the S&P 100:
I think the chart speaks for itself. In case it doesn’t, or its all gibberish, stay tuned and shortly I’ll go into some detail about how I use it.
In the meantime, if you’re going to head over to StockCharts.com to experiment with all the % above MA stuff they have, remember to add ‘R’ at the end of the code/symbol. Otherwise you’re not looking at a percentage measure.
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