Friday, May 2, 2008

The 200ma Cross

The Nasdaq 100 led the way today as it rose over 3% and closed decisively above its 200-day moving average. It is the 1st major index to retake the 200-day (the S&P mid-cap 400 also did it today if you consider that one major). Some people believe the 200-day moving average is an important technical measure. Some suggest it’s a somewhat meaningful psychological level. Others see little value in looking at it. Rather than discuss and postulate on the merits of an indicator, I prefer to test it. Let’s see what a cross of the 200-day moving average in the NDX has led to in the past. (Test period is mid 1986 - present.)

Over the period tested the average gain per day in the Nasdaq 100 was just under 0.09% ($90). As you can see, the market seemed to gain steam after crossing the 200-day moving average and strongly outperformed the typical period.

What if we add a filter to eliminate those times where it barely peeked across? I filtered to only look at crosses that finished at least 0.5% above the 200ma. Results below:


These results are even stronger.

How about if we also require that the NDX makes a good-sized move on the day of the cross? I used a 2% gain to test this. More results:


Whatever the reason, a move through the 200-day moving average has provided the NDX some extra fuel in the past. When the move was strong and decisive like Thursday, that made for even better results. A cross above the 200-day moving average isn’t a magic buy signal – but there are worse ones.

Image courtesy of DialBforBlog.

10 comments:

bhh said...

Important to note that the Nasdaq crossed the 200ema but is still about 45 points shy of the 200sma so that becomes a key confirmation threshold IMHO. btw, the wit of your accompanying images is brilliant.

Rob Hanna said...

Thanks bhh,

The tests looked at the Nasdaq 100, which did cross the 200 simple MA yesterday. As you note, the Nasdaq composite is still shy of it.

Rob

bhh said...

oh yes, you're right. Must finish my coffee before commenting.

karl k said...

Rob, interesting study.

It would also be revealing I think to correlate this breach of the 200 day with earnings reports, particularly with positive earnings reports of the bigger cap weight stocks in the index. My guess would be that the profitable trades in your backtest are highly correlated with strong earnings reports from these large stocks, while the less profitable/unprofitable trades occur when the 200 day average is breached absent such reports.

But, as I said, just a guess.

Guru said...
This comment has been removed by the author.
Guru said...

Am I reading your spreadsheet correctly? You're looking at most 20 days after the event? I'm sorry, that's nearly meaningless unless you're exclusively a day- or swing-trader. If you have longer than a 20-day horizon you'd see that a cross of the 200-day (I use 180-day moving average in my indicator but arrive essentially at the same conclusion, see www.stockchartist.blogspot.com) is very significant as far as calling a tentative bottom and the 300-day moving average is the trigger for the arrival of a true bull market.

Anonymous said...

it should be noted that in just about every case, the market first traded lower at some point; presumably to create what you would call a head fake or bear trap. Care should be taken as the re-test can be signicant.
The tests i ran looked out 90 days and found that holding on avg for about 2 months (61 days) produced the best results (+76%) for intermediate term traders; with the caveat that they should expect the index to snapback below it's 200MA first to fuel up on bears.

Johan Lindén said...

Rob, I breach up of this 200 MA also means that the index is not far from breaking down again. So what happens if the index breaks down from 200 MA.

Sorry for being so negative ;)

Anonymous said...

and there it is, back below the 200MA. As i pointed out a few days ago, though the stats are favorable for a rebound to new highs within the next two months, invariably the market has traded back below that 200MA price entry each time, sometimes significantly lower. This may be one of those times. Remains to be seen.
-mbs

Johan Lindén said...

It's been 4 buy signals now.