“Im getting out, it just crossed below the 50 day moving average.”
- every trader in history
Perhaps saying every trader has said this is a stretch but it would not be a stretch to say a vast majority of technical traders have said — and done — this. Equally inaccurate would be to say every trader loses all their money, but it would once again not be a stretch to say that many do. If most traders lose money, and most traders do this, we must find a new understanding of the market place. This is a small attempt at a new understanding.
If we take our Basic Understandings of the market place as our basis for when bull and bear markets exist, we can start to ask some interesting questions of the 50 day moving average. For instance, what happens if we are in a bull market, and price crosses below the 50 day MA? Furthermore, what if we short the market when it crosses below the 50 day MA, and cover only when price crosses back above it? The answer is we lose a bag full of money and are only right 15% of the time. 50 trades and 43 losses, as it were.
But there is something to understand from price and its relation to the 50 day MA. This is quite profound actually; when price crosses further than 1% below the 50 day MA, MACD will almost always be below zero. Some might say “so what?” to this, but we’ve just gone over some fantastic information. In short, weak momentum happens when price crosses 1% below the 50 day moving average and — perhaps more importantly – all great buy points in bull markets are BELOW the 50 day MA. Conversely, all great sell points in bear markets are ABOVE the 50 day MA. Ill now demonstrate this with some charts over various markets.
On this chart in red is the 1% envelope surrounding the 50 day MA. Notice how when the 2 day EMA drops below the -1% line MACD also drops below zero. Then notice that when it rises back above +1%, MACD is then back above zero. Here it is with price shown.
Now we have to pay close attention to the circled area. MACD, for a brief second, did cross below zero. However, price did not fully cross and close below -1%. This clearly was just a small blip, not a serious pull back. The following charts show this in action within multiple markets (copper and Crude have been adjusted to 1.5% envelopes — the assumption is they are more volatile markets).
In addition, if we check back to our work on MACD Cycles we now can extend that to the 50 day MA. If within bull markets, MACD cycles below zero last on average 3.8-4.3 weeks, then we can now say; counter trend sell offs will spend an average of 4 weeks below the 50 day MA. We now know that no bull market has spent more than 11 consecutive weeks below the 50 day MA (without turning into a bear market). On top of that, all counter trend moves spend at minimum 2 weeks below the 50 day.
Concluding this, we have found that selling a move below the 50 day MA — within the context of a true bull market — is wrong. Because of this, we have come to the outstanding realization that all great buy points in bull markets are below the 50 day MA, not above it. Furthering out understanding of this, we can now anticipate these counter trend cycles to spend roughly a month below the 50 day MA.
My hope is these new understandings will over take the old, ridged, and uninformed opinions about price as it relates to moving averages. A bold and daring hope – to say the least.
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