Chart of the Day: Fewer Stocks In Downtrends

JC Parets
August 8, 2022

Why do people use the 200 day moving average?

The real answer is because a lot of charting software packages the past few decades have set it as a default.

But you also hear guys like Paul Tudor Jones talk about how below a 200 day moving average, you get out. In other words, bad things happen below the 200 day.

For me, I have reasons for doing everything. And while I understand that there are more like 252 trading days in a year, not 200, I still believe that if a stock is below its 200 day simple moving average, it's probably not in an uptrend.

This is specifically for my personal definition of an intermediate-term timeframe. I like to look out weeks and months, not years, and certainly not hours or days.

200 days is a good number for me. And while it's not perfect (hint: nothing is) looking at the percentage of stocks above their 200 day has historically given us some great washout signals.

It's when this number falls below 15% and then rises back above 15% of that I get most interested.

In other words, rather than catching the falling knife, the idea is to buy on the way back up.

And this whole "stocks go up again" thing isn't new. Keep in mind that the average stock in the Nasdaq is already up 37% from this year's lows.

We all just witnessed a serious decline in stocks that began in February 2021.

Have we seen enough?

Do you think a 37% move rebound in the average stock is too much too fast?

Or is this just the beginning, like Spring 2020 or New Years 2019?

Let us know what you think. We love to hear from you.

And if you're interested in how we feel about this market and which trades we're putting on, make sure to check my favorite new tool.

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