Companies Breaking their 50-Day Moving Average

by Craig on 26/01/10 at 2:35 pm

One of the tools we use to find interesting trading opportunities is the relationship between a stock’s share price and its 50-day moving average (50 DMA). We use the 50 DMA in a number of ways including to measure overall market breadth (Market Breadth) and to indentify overbought or oversold companies (Trading the 50 day moving average).  In this post, we look for companies that are breaking through their 50 DMA lines, either to the upside or downside.

Technically speaking a company trading above its 50 DMA is in a bullish trend while those trading below its 50 DMA are in a bearish trend. Moving from a bearish to bullish trend, or vise versa, can often be a significant trading signal. As an example, we have included a chart of Encana Cp over the past year. Green circles signal breaks above the 50 DMA (bullish) and red circles breaks below (bearish).

You may notice we have not circled every time the share price broke the 50 DMA. As with every trading tool, we need to add a few caveats. First we only take note of a break through in the 50 DMA if the share price was on the other side of the line for at least 10 trading sessions. This helps ignore cases when the share price is ‘hugging’ the 50 DMA line as these are not necessarily break out events. Also, when we enter a trade we include a buffer of 3 or 5% as a stop loss. This helps address any temporary retracements.

Companies Breaking Their 50 DMA Lines Today

As a demonstration, the companies listed below have been trading below their 50 DMA lines for at least the past 10 trading sessions and have broken to the upside. Sherwin-Williams and Travellers also gapped to the upside by 5.9% and 2.1% respectively (Trading Gaps). Note, no members of the TSX broke to the upside at the time of writing.

There are many more to the downside including eight members of the TSX.

Also worth taking note is the number of defensive names in the list including Bell Alliant, Enbridge, Transalta and TranCanada. Utility like companies have been some of the better performers of late, perhaps the defensive trade in these names is getting tired.