This Rare “Buy” Signal Could Soon Flash For US Stocks

This Rare “Buy” Signal Could Soon Flash For US Stocks
Jonathan Hobbs

10 months ago1 min

With so much economic uncertainty ahead, you might be wary about this year’s stock market rebound. But there’s a signal brewing that could give you more confidence in the rally.

The signal works like this: whenever the 21-week exponential moving average (EMA, yellow line) crosses above the 50-week simple moving average (SMA, blue line), it tends to suggest a strong uptrend ahead for the S&P 500. Historically, when it’s happened, you’d have been better off in the market than out. I’ve explained how moving averages work here, but the gist of it is that the 21-week EMA is more reactive to recent price action. So when it crosses above the 50-week SMA, as it’s done here wherever you see a line of gray dashes, it shows strong momentum from buyers.

I’ve backtested the signal’s results since 1975 and here’s what I found. Of the 16 times it fired, 13 have led to S&P 500 rallies of at least 20%, with six being greater than 40%, and two being greater than 100%. Now, the time taken to reach those highs varies a lot, but the average was about two years. So if you like those stats, you might want to see the index hold steady for now – that way the cross is a lot more likely to happen. You also might want to add the two moving averages to your own S&P 500 chart in TradingView (you can learn how to do that here), so you can consider buying the SPDR S&P 500 ETF Trust (ticker: SPY; expense ratio: 0.095%) on the first Monday morning after the cross.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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