The 50-day moving average marks the limit for traders to hold positions in the inevitable decline. When the price approaches this turning point, the strategy we use will usually determine whether we walk away with a deserving profit or a frustrating loss. Considering the consequences, it is necessary to improve our understanding of this price level and find new risk management methods when it comes into play.
The most common formula takes the last 50 price bars and divides by the total. This resulted in the 50-day simple moving average (SMA) used by technicians for decades. Over the years, as market participants have tried to make better mousetraps, the calculation method has been adjusted in many ways. The 50-day exponential moving average (EMA) provides the most popular changes, responding to price changes faster than its simple-minded cousin. This extra speed of signal generation has a clear advantage over the slower version, making it a better choice.
The 50-day EMA provides technical staff with seats on the 50-yard line, which is an ideal location to watch the entire playing field, looking for mid-term opportunities and a natural counterattack after active trends (higher or lower). When price behavior is often misunderstood by most people, it is also neutral. As our opposite market has proven time and time again, when most people are on the wrong side, the most reliable signals tend to burst.
There are many ways to use the 50-day EMA in market strategy. It can be used as a reality check when a position hits the magic line after a rebound or sell-off. It has the same advantages in lower and higher timeframes, applying indicators to intraday charts or using the 50-week or 50-month version to track long-term trends. Or play a game of pinball and trade oscillating between the 50-day EMA and the long-term 200-day EMA. It even applies to the mysterious world of market voodoo, where a 50/200-day cross indicates a bullish golden cross or a bearish death cross.
The 50-day EMA most often works when you are positioned in a trend that runs counter to you in a natural reversal, or reacts to the impulse that pushes thousands of financial instruments upward. Setting a stop loss on a moving average makes sense because it represents an intermediate support (resistance in a downtrend) that should be maintained under normal tape conditions. The problem with this reasoning is that it has not achieved the desired effect in our turbulent modern market.
In the past two decades, due to aggressive stop-loss hunts, the 50-day and 200-day EMAs have changed from narrow lines to wide areas. Before setting a stop loss or timing of entry at or near the moving average, you need to consider the depth of these violations. In these cases, patience is the key, because testing of the 50-day EMA usually resolves within three to four price bars. The trick is to avoid obstacles until a) the reversal starts or b) the level breaks out, thereby generating a price push on your position.
The risk of error can hurt your wallet, so when the price tests the 50-day EMA, how long should you hold on? Although there is no perfect way to avoid dishwashing, checking other technical indicators can usually determine the exact range of the reversal. For example, Intel (INTC) returned to its January high in April and sold to the 50-day moving average. It broke the support, fell to the 0.386 Fibonacci retracement level, and rebounded to the moving average in the next trading day. The stock regained support on the third day and entered the recovery phase, completing the cup handle breakthrough mode.
50 days fractal
Moving averages are equally valid in the lower and higher time frames. Therefore, intraday traders will benefit from placing 50 EMAs on the 15 and 60 minute charts because they define the natural end of intraday oscillations. Remember that the noise will increase as the time frame decreases, thereby reducing its value on the 5-minute and 1-minute charts. On the other hand, the indicator shows excellent reliability on weekly and monthly charts, and can usually pinpoint corrections and turning points in long-term trends.
Considering that the 50-week EMA defines a reversion to the mean over the entire year, and the 50-month EMA tracks market activity over four years, which is close to the average length of a typical business cycle, this makes sense. Market timers can use these long-term moving averages to establish profitable positions that last for months or years, while violations of the rules provide the perfect level to profit and reallocate capital to other long-term instruments.
Apple (AAPL) set excellent buying opportunities in the 50-month EMA in 2009 and 2013. It broke through the moving average support in September 2008, and spent 5 months honing sideways before returning to that level in April 2009, and released the “Failed Failure”“ Generate a buy signal of more than 80 points in three years. It tested the moving average for the second time in 2013, and it took four months to establish a double bottom, triggering a 100% rebound in 2014. Note how the lows perfectly match the support levels, providing patient market participants with incredibly low-risk entry opportunities.
50-200 days pinball
Fast trends in both directions tend to increase the separation between the 50-day and 200-day EMA. Once the countertrend breaks through one of these averages, it usually enters another average and sets up several rounds of 50-200 “pinball” strategies. Swing traders are the natural beneficiaries of this two-sided technique. They go long and then short until one side of the box gives way to more active trend impulses.
BIIB (BIIB) set a new high in March after a long-term upward trend, and entered a steep correction a few days later and broke the 50-day moving average. The price movement then entered a two-month 50-200 pinball game, crossing over 75 points between the new resistance of the 50-day EMA and the long-term support of the 200-day EMA. The swing reversal occurs close to the target number, which allows three-digit stocks to enter the market with ease and relatively strict stop losses.
Bullish and bearish crossover
The downward cross of the 50-day EMA and the 200-day EMA marks a death cross, and many technicians believe that this marks the end of the uptrend. The upward cross or golden cross is said to have similar magical properties in establishing a new uptrend. In fact, countless criss-cross signals can be printed during the life cycle of an upward trend or a downward trend, and these classic signals have almost no reliability.
The situation is different for 50-week and 200-week EMA. SPDR S&P Trust (SPY) shows four valid crossover signals from 15 years ago, two in each direction. More importantly, there were no false signals during this period, including three bull markets and two bear markets. According to historical Dow Jones industrial data, the last invalid crossover occurred more than 30 years ago, in 1982. This tells us that gold and death crosses should be respected in market analysis.
The 50-day EMA determines the natural average regression level of the intermediate time frame. It has many applications in price prediction, position selection and strategy construction. Traders, market timers and investors all benefit from 50-day EMA research, making it an indispensable part of your technical market analysis.