Want to know about Technical Analysis but don't know where to start? With all the technical indicators and strategies out there, it's very easy to get caught up with indicators that offer investors a confusing amount of data while promising exceptional win rates. However, the fascination with the search for the best technical indicators can also lead to over-analysis or strategy shifting. In my experience, investors or traders would tell you there isn't a best indicator or strategy, but there is the "best one for you".
Trading and investing strategies cater to different types of traders and investors. Some may be aggressive, and some may be conservative. As a starting investor, it is good practice to have a solid foundation through a basic indicator and then build on top of that foundational understanding to create a trading plan. One such indicator is the 50-day simple moving average.
Before jumping into the strategy of trading using the 50-day moving average, it is essential to understand what the 50-day moving average is, and how it works. Simply put, the 50-day simple moving average is the average closing price of a stock over the past 50 trading days. It is a popular indicator used in technical analysis to gauge the momentum and direction of a stock's price while offering a smoothed-out picture of a stock's performance over time. It can help investors identify trends and patterns that may be difficult to discern from daily stock price fluctuations. By looking at the 50-day moving average, investors can gain insights into whether a stock is in an uptrend or downtrend, and use this information to make more informed investment decisions.
How do you use it?
One of the common ways to use the 50-day moving average is to understand the trend. Shorter period moving averages relay the short-term trend, and longer periods provide the current long-term strength. Stocks trading above these moving averages are considered bullish or in an uptrend, and those trading below it are considered bearish or downtrend. So when the stock price crosses above the 50-day moving average, investors and traders would perceive it as a buying signal. Conversely, when a stock's price falls below its 50-day moving average, it is seen as a sell signal that indicates the stock may be headed for further losses. Investors willing to buy above would convey that they are willing to pay more than the average price of the stock because they expect prices to continue to increase.
The rationale behind this strategy is that when a stock's price crosses over its 50-day moving average, it signals a shift in investor sentiment. This shift may be caused by a variety of factors, but whatever the reason, when a stock's price crosses above its 50-day moving average, it suggests that investors are becoming more bullish on the stock, and are willing to buy at higher prices.
Pros and cons of the strategy
Even with the simplicity of using the moving average, investors should still be aware of the advantages and disadvantages of buying stocks when they cross over the 50-day moving average. You can indeed buy the stock at the signal of the change in trend, but crossovers can still fail if there is no follow-through from other investors. Investors should still employ proper risk and trade management to protect their principal capital. In addition, one of the main criticisms of moving averages is that it is based solely on past price data, and may not accurately reflect future market conditions. Investors are encouraged to test the strategy in a non-live or paper trading environment to understand the strategy and its limits.
To better understand this, let’s look at 3 companies that generated a 50-day moving average crossover signal.
California Water Service Group Holdings (CWT)
California Water Service Group is a public water utility company providing drinking water and wastewater services, including wastewater collection and treatment that enables water recycling. The company was founded in 1926, and today it is the third-largest water utility in the US, with over 1,225 employees. It provides service to more than 2 million people in 100 communities.
CWT provides its services through five subsidiary companies:
- California Water Service
- Hawaii Water Service
- New Mexico Water Service
- Washington Water Service
- Texas Water Service
Will history repeat itself?
CWT just crossed above its 50-day moving average, signaling a potential change in trend. RSI is in bullish territory without any signs of exhaustion. Often, when CWT’s price crosses over the 50-day moving average, buyers step in and buy into CWT, creating a short-term uptrend that investors and traders can exploit. Investors willing to buy into CWT should always employ proper risk management if there is no follow-through from other buyers.
Johnson & Johnson (JNJ)
Johnson & Johnson is a multinational corporation based in New Brunswick, NJ, that manufactures and sells health-related products and services. It is also one of the world's most valuable corporations, employing more than 140,000 active employees.
JNJ's operations are segmented into three groups:
- Consumer Health: Provides products based on science and approved by medical experts to help people improve their health.
- MedTech: Diverse healthcare expertise and purposeful, innovative technology help save lives and aim to create a future where healthcare solutions are smarter, less intrusive, and more personalized in surgery, orthopedics, and interventional solutions.
- Pharmaceutical: Products distributed through the Janssen Pharmaceutical Companies. Janssen envisions a future in which disease prevention, early detection, treatment, and cure will change thanks to its cutting-edge biologics and other medical components.
Is this a shift in trend?
JNJ’s continuous downtrend since the start of the year has been persistent. However, at the end of February, investors were starting to see JNJ begin to carve a bottom with its constant oversold signals and price range. After these signs of exhaustion, JNJ broke out of the tight range and closed above its 50-day moving average. The question is, is this signal for buyers to step in, and will there be a follow-through?
SJW Corp (SJW)
SJW Corp. is a holding company that operates through four wholly-owned subsidiaries:
- San Jose Water Company (SJWC)
- SJWNE LLC
- SJWTX, Inc.
- SJW Land Company.
The companies operations have two segments of operation:
- Water Utility Services - offers its customers water utility and utility-related services through SJW Group’s subsidiaries, Connecticut Water, New England Water Utility Services, Inc. (NEWUS)., CLWSC, SJWC, and Maine Water.
- Real Estate Services - engaged in property management and investment activity conducted by Chester Realty, Inc. and SJW Land Company. SJWC is a utility company that provides water service in the metropolitan San Jose, California area.
Is this a continuation of the uptrend?
Since Oct. 2022, SJW has been on an uptrend but started to reverse its course at the start of the year slowly. However, prices were not falling sharply, and RSI was also moving between the 38.8 - 58.8 range, signaling a consolidation of SJW’s prices. However, prices have been testing the 50-day moving average since last week, and SJW successfully closed above it yesterday. This signals a potential shift in investor sentiment as the RSI is also starting to slope upward (above the 50 mark). Investors willing to buy into SJW should probably want to wait for proper confirmation and follow through with its previous retests failing. Proper risk management is always a must.
Final Thoughts
Investors should never forget that building a strategy over the 50-day crossover is the first step in making a comprehensive investing plan. Even with rigorous testing, investors should not be complacent with win rates and historical results and employ proper risk and trade management as markets are volatile and can quickly turn around in the blink of an eye.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
