Moving averages – indicating bull or bear markets?
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April 16th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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The table below provides a summary of the 50- and 200-day moving averages pertaining to a number of global indices. The orange shading indicates indices still trading below their moving averages and show the percentage gain required in order to reach the moving average line. Conversely, the green shading shows those indices that have already breached the moving averages to the upside and the numbers indicate the percentage decline that will reverse the break.
Click on the table below for a larger image.
The 50-day moving average is an indicator of the secondary trend and has been breached by all the markets on the list with the exception of Copenhagen. However, the longer-term 200-day moving average is of more importance as an indicator of the primary trend. Although it is a lagging indicator by construction, it fulfils a useful role to keep investors on the right side of the long-term trend.
It is important to note that the three conditions must be met in order to flash new equity bull markets, namely (1) the index in question must penetrate the 200-day average, (2) the 50-day average must cross the 200-day line, and (3) the 200-day average must turn upwards.
The current situation is one where a number of emerging markets - China, India, Brazil, Venezuela, Taiwan, South Korea and Chile - have to a greater or lesser extent crossed their respective 200-day moving averages. In the case of China, the 50-day line has also broken the 200-day line.
Studying chart patterns of the various global bourses leads one to conclude that in the case of a number of emerging markets base formations have possibly been completed and that the cycle lows may very well be in. However, as far as mature markets are concerned, the picture remains inconclusive until primary trend indicators turn positive.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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