50 Day Moving Average

The 50 day moving average is widely watched technical study and for good reason. A rising 50 day MA often acts as support for a stock on pullbacks and a declining 50 DMA often acts as resistance on bounces. As with any technical tool, the 50 DMA is simply a tool, not a reason to buy or sell. Moving averages are a visual reference point to compare price action to over a certain period of time.

I often mention that we don’t want to buy just because a stock is touching its rising 50 DMA, but instead we want to take our analysis to a shorter timeframe to look for evidence that a turn may in fact be setting up.

Today shares of $BIDU got smashed and after a sharp correction from the 135 level just one week ago it seemed reasonable the the 50 DMA might find enough demand to support prices. That is the theoretical part of the trade, strong pullbacks will often find support and bounce from a rising moving average. More important the theory and tendencies for a stock to act a certain way is actual price action. Only Price Pays!™

Looking at the daily chart on the left, we can see that the 50 DMA resides at 118.53. A closer look at the intraday action of the stock today shows (blue arrows) where the stock touched that level on the way down. I am sure some people had their bids in at 118.53 expecting the stock to immediately bounce higher, but the intraday chart shows that there was ZERO EVIDENCE that sellers were slowing their sales or that buyers were stepping up to provide any meaningful support. The stock sliced through the 50 DMA and remained below the declining VWAP until late in the session. There are undoubtedly some people who did really well buying on the way up, but where was the real evidence of a meaningful turn? It certainly didn’t come as the stock touched the 50 DMA!

I don’t want to get into a discussion about when the correct time to buy was, I think the stock was an avoid, but you are free to leave your comments if you like. My only point is to get you to realize that, like any other technical indicator, moving averages can only lead us to the idea. We cannot be lazy and just buy, we have to understand the psychology behind price movement on a deeper (shorter term) level to truly have the odds in our favor for a low risk/ high probability trade, the 50 DMA by itself does not provide us with those odds.