As your stock moves up in price, there is a key line you want to watch. This is the 50-day moving average. If your stock stays above it, that is a very good sign. If your stock drops below the line in heavy volume, watch out, there could be trouble ahead.
A 50-day moving average line takes 10 weeks of closing price data, and then plots the average. The line is recalculated everyday. This will show a stock’s price trend. It can be up, down, or sideways.
You normally should only buy stocks that are above their 50-day moving average. This tells you the stock is trending upward in price. You always want to trade with the trend, and not against it. Many of the world’s greatest traders, past and present, only trade or traded in the direction of the trend.
When a successful stock corrects in price, which is normal, it may drop down to its 50-day moving average. Winning stocks normally will find support over and over again at that line. Big trading institutions such as mutual funds, pension funds, and hedge funds watch top stocks very closely. When these big volume trading entities spot a great stock moving down to its 50-day line, they see it as an opportunity, to add to, or start a position at a reasonable price.
What does it mean if your stock price slices downward through it’s 50-day line? If it happens on heavy volume, it is a strong signal to sell the stock. This means big institutions are selling their shares, and that can cause a dramatic drop in price, even if fundamentals still look solid. Now, if your stock drops slightly below the 50-day line on light volume, watch how the stock acts in the following days, and take appropriate action if necessary. Be objective in your stock market decisions.