The 50-day moving average is one of the most widely respected technical indicators among investors looking for excellent growth stocks and breakouts. This line helps investors gauge immediately whether a stock is showing strength or weakness, depending on its current price relative to the position of the line.
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The 50-day moving average that IBD uses is a simple moving average, meaning it's not an exponential average that weighs recent action more heavily.
The line itself is created by simply taking a stock's closing prices from the past 50 trading sessions, averaging them together, then plotting that average price over time. Investors should then use this line as a point of comparison with the stock's current price action.
The 50-day line is one of the first things to be aware of when analyzing a stock chart. Stocks trading above this line can be assessed immediately as showing signs of strength. If a stock is trading below this line, then it's typically a sign of weakness.
Additionally,when a stock is forming a base, that base should ideally form partially or even entirely above the 50-day line. That way, if the stock does break out, theninvestors don't have to worry about it being turned away at the 50-day line.
Daily charts in both MarketSmith and Investors.comidentify the 50-day moving average as the bright red line weaving horizontally through the chart. If you're looking at a weekly chart, you can find the 50-day line's nearly identical twin: the 10-week line.
The 10-week moving average tracks a stock's weekly closes over the past 10 weeks.
Using The 50-Day Line To Analyze Growth Stocks
The 50-day line is powerful. You may be wondering why this magical line works so consistently across all stocks as a universal point of reference.
Major institutional investors often use the 50-day as a point of reference for entries, adding to their positions when a stock pulls back to the line. This institutional buying creates upward pressure — or support — to help keep the stock's price above that moving average.
Conversely, the line also acts as an area of resistance when a weak stock is trading below it. Once below that line, market forces create a level of downward pressure. This makes it difficult, though not impossible, for a stock to climb back above. This is because institutional investors are now using the line as a sell level instead of a buy level.
Short sellers may even use it as sell point for shorting the stock.
Once a stock has collapsed below its 50-day line in heavy volume, you can be sure it won't be able to reclaim the level without a fight. Stocks need the muscle of institutional buying power to get back above their 50-day lines.
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50-Day Line: When To Buy Or Sell A Stock
The most important thing about the 50-day line? This chart tool comes with its own special set of buy and sell rules.
If a stock that's held above the 50-day line for weeks or months clearly breaks below the line in heavy volume, consider this a sell signal. This is a key to good portfolio management and is referred to as having a clear line in the sand for entering and exiting positions.
On the other hand, when a stock is trending above its 50-day or 10-week line, investors can use brief pullbacks to this level asfollow-on buying opportunities. These opportunities emerge after stocks have made their initial move from a base breakout, which is why they're called follow-on buys.
The 50-day moving average is plotted on IBD Charts and MarketSmith charts in red.
Netflix, Vertex Test Cases
In 2020, Netflix (NFLX) lifted off from the 50-day line a couple of times in June. While shares traded below the 50-day line on June 5 and 8, the stock never closed below it. Therefore, there was no decisive break of the moving average. Rebounds from those levels gave Netflix new energy to extend its advance.
About the same time last year, Vertex Pharmaceuticals (VRTX) fell below the 50-day line July 24. While there was no sell signal immediately, the stock continued to weaken. It met resistance at the 50-day line in September and October before deepening its losses.
This article was originally published June 12, 2020, and has been updated.
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