Payne's Perspective: July 26, 2021: Riding the Waves
Last week in Payne’s Perspective, I incorporated new metrics to explain that while market internals had become sloppy, the overall market was oversold. The combination of those factors saw a major pullback on Monday, followed by share recovery sessions on Tuesday and Wednesday, and a strong session on Friday that moved from emotional trading to earnings reactions.
It was an extraordinary week that once again proved counting out the rally at the first sign of trouble is a mistake. Moreover, buying dips remains an effective money-making maneuver. But it’s still a lot harder than it looks, and it already doesn’t look easy, to begin with. The market is still vulnerable, but when growth provides leadership, the big equity indices shine.
Talk about the haves and have-nots. Unfortunately, winners are more select and powerful as only 36% of names on the S&P 500 are trading above their 50-day moving average.
For me, the 50-day moving average is important as an indicator of whether trends can remain in place for stocks or indices. When they hold as support or resistance, the trend is generally considered safe and informs actions on buying and selling. Conversely, when they fall, it means there could be a significant course correction.
Rallies turn to pullbacks, and sagging markets find a spark higher.
I find the inflections associated with the 50-day moving average. It brings the 200-day moving average into play, which could mean potentially huge upside or downside. Failure to hold it might mean a period of pain for long-term investors and sell signals for trades. Conversely, breaking through on the upside means sharp rallies that could lift the underlying security toward targets and often lures traders on the bandwagon.
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