🥇 First rule of investing? Know when to save! Up to 55% off InvestingPro before BLACK FRIDAYCLAIM SALE

How To Effectively Use A Moving Average Confirmation Rule

Published 06/22/2021, 12:41 AM
Updated 07/09/2023, 06:31 AM
NDX
-
US500
-
DJI
-
US2000
-
DIA
-
SPY
-
QQQ
-
IBB
-
DX
-
GLD
-
SLV
-
IWM
-
VBK
-
KRE
-
XRT
-
JNK
-
TLT
-
IYT
-
DBA
-
LIT
-
UGA
-
SMH
-
XLU
-
VXX
-

Friday, the major indices including the small-caps Russell 2000 via iShares Russell 2000 ETF (NYSE:IWM) and S&P 500 via SPDR® S&P 500 (NYSE:SPY) closed underneath their 50-Day moving average.

However, on Monday, both reversed and ended the day above their 50-DMA.

With Friday’s weak price action, any bearish traders who decided to short these indices based on a break of the 50-DMA would now be underwater in their trades.

IWM-SPY Daily Charts

For this reason, we follow a simple rule to confirm price breaks under or over major moving averages. The rule is to wait for the price to close for 2 consecutive days under/over the 50-DMA. Often, price can temporarily dip or clear a pivotal MA before reversing.

With that said, no trading rule is perfect, and you risk getting a subpar entry or sometimes completely missing the trade if there is a large gap in price the next day.

However, in the long run, it will pay for itself as there are many times when price action will trap traders before running in the opposite direction.

Some quick tips to make the rule more powerful from a trading perspective would be to watch how strong the 2 closes are and if they stay near the 50-DMA or continue to push away from it.

A second close near the MA shows that price action could still be indecisive and therefore waiting might be the next best plan.

This can help time your entries to make sure you do not get chopped or whipsawed in the market.

ETF Summary

  • S&P 500 (SPY) Filled gap to 419.23. Support 414.70.
  • Russell 2000 (IWM) 221.13 support.
  • Dow (DIA) 332.68 support.
  • NASDAQ (QQQ) 342.80 pivotal area.
  • KRE (Regional Banks) 64 support.
  • SMH (Semiconductors) bounced off 244.77 the 50-DMA.
  • IYT (Transportation) 254.65 support.
  • IBB (Biotechnology) Needs to hold 159 area.
  • XRT (Retail) Did not confirm caution phase. 91.57 support.
  • Volatility Index (VXX32.35 the 10-DMA.
  • Junk Bonds (JNK108.94 support. 109.57 resistance.
  • XLU (Utilities) 63.17 support.
  • SLV (Silver) 23.92 pivotal.
  • VBK (Small Cap Growth ETF) 278.34 support.
  • UGA (US Gas Fund) 35.85 resistance.
  • TLT (iShares 20+ Year Treasuries) 142.22 support the 10-DMA.
  • USD (Dollar) Watching to hold the 200-DMA at 91.50.
  • LIT (Lithium) 66.17 support.
  • DBA (Agriculture) 17.67 support with 18.40 resistance.
  • GLD (Gold Trust) 164.87 new support.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.