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Jesse Livermore is often regarded as one of the greatest stock traders in history, and was notorious for having bad breath. People who knew him said every time he opened his mouth it was like a hot scolding feces was slapping them in the face.

Just kidding I made that part up, but he was famously making his fortune by shorting the stock market during the 1929 crash. Yet, one of his less highlighted but equally valuable approaches involved the careful use of moving averages, including the 200-day moving average.

In his book, "Reminiscences of a Stock Operator," based on his life experiences, Livermore talked extensively about the importance of following trends and market signals diligently. One of his remarkable strategies was using key indicators like the 200-day moving average to identify the broader trend. He would often wait until a stock surged above its 200-day moving average before buying in, thus maximizing his chances of catching a strong uptrend early. Conversely, if a stock dipped below this line, he would either offload it or hold off on buying, interpreting the dip as a weakening state and potential downward trend.

Livermore's disciplined approach to waiting for the right signal offers invaluable lessons for today’s intermediate traders. His success shows that respecting technical indicators like the 200-day moving average can be crucial for validating trends and optimizing your trading strategies.

DID YOU KNOW?

• In 1987, just before the infamous Black Monday crash, the percentage of stocks above their 200-day moving average fell dramatically, serving as an early warning sign to keen observers.
• During the dot-com bubble peak in 2000, fewer than 40% of NASDAQ stocks were above their 200-day moving average at a notoriously overheated time, indicating that most stocks were struggling despite market euphoria for a few high-flyers.
• Behavioral finance experts argue that the percentage of stocks above their 200D MA acts as a psychological barometer for investor sentiment, oscillating between optimism (above 200D MA) and fear (below 200D MA).

What Does The Percentage Of Stocks Above 200D MA Tell Us?

The Percentage of Stocks Above their 200-Day Moving Average (200D MA) is a market breadth indicator that shows the proportion of stocks trading above their 200-day moving average out of a specified group, often within a market index like the S&P 500. This percentage gives traders a snapshot of market health and long-term momentum, helping gauge the collective strength or weakness of stocks.

How does Percentage Of Stocks Above 200D MA work?

This indicator works by taking the number of stocks within a given index that are trading above their 200-day moving average and dividing it by the total number of stocks in the index. For instance, if 300 out of 500 stocks in the S&P 500 are above their 200D MA, the percentage would be 60%. This calculation helps identify the general direction and strength of the market, offering insights into potential trends.

How do you use Percentage Of Stocks Above 200D MA?

Intermediate traders can use this indicator to assess overall market sentiment. For example, a high percentage (typically over 70-80%) often signals an overbought market, suggesting potential pullbacks, while a low percentage (under 20-30%) indicates oversold conditions, potentially hinting at a market bottom or buying opportunities. Tracking these percentages over time helps traders understand shifts in market dynamics.

Why Is the Percentage Of Stocks Above 200D MA important?

The percentage of stocks above their 200D MA is important because it provides a comprehensive view of market health and direction. It acts as a barometer for the broader market, helping traders make informed decisions. By understanding whether most stocks are in long-term uptrends or downtrends, traders can better gauge the market’s overall strength or weakness, making more strategic trading choices.

What does Percentage Of Stocks Above 200D MA tell us?

When a high percentage of stocks are above their 200D MA, it suggests strong market momentum and a bullish sentiment. Conversely, a low percentage indicates bearish conditions and possible market weakness. This indicator helps traders and investors understand if the market is in a phase of accumulation, where stocks are being bought, or distribution, where they are being sold.

How to use the Percentage Of Stocks Above 200D MA with trends?

To use this indicator with trends, observe the percentage changes over time. During an uptrend, the percentage of stocks above their 200D MA will typically rise, confirming the trend's strength. In a downtrend, this percentage will fall. By identifying divergence—when the indicator trends opposite to the market price—you can spot potential reversals and adjust your trading strategy accordingly.

STRATEGIES

Contrarian Strategy:

If the percentage is extremely high (above 85-90%), consider preparing for pullbacks. Start liquidating some positions or using options to hedge. Similarly, if the percentage is extremely low (below 10-15%), it might be time to start building positions as the market could be due for a rebound.

Momentum Strategy:

If the percentage is consistently above 50% and rising, it confirms bullish momentum. Focus on growth stocks in leading sectors, as they are likely to outperform. In contrast, if it’s below 50% and dropping, favor more defensive stocks or consider short-selling opportunities.

Divergence Strategy:

Watch for divergence between this indicator and the overall market index. For instance, if the S&P 500 is rising but the percentage of stocks above their 200D MA is falling, it might indicate weakening market breadth and a potential reversal, signaling it's time to adjust your holdings.

TIPS

Ever wondered how the percentage of stocks above the 200-day moving average can boost your trading success? By the end of this short, you'll discover three powerful tips to leverage this indicator, elevating your swing trades to the next level. Let's dive in and unlock the secrets that intermediate traders often overlook!

Determine Market Health

Problem: Struggling to understand market trends?

Solution: Use the percentage of stocks above the 200-day moving average (MA) to gauge overall market health. When over 60% of stocks are above this MA, the market is generally bullish. Conversely, if less than 40% are above, it's bearish. This indicator lets you align your trades with market momentum, ensuring you ride the right trend and avoid catastrophic losses.

Spot Reversal Points

Problem: Finding precise entry and exit points?

Solution: Look for divergences between the broader market trend and the percentage of stocks above the 200-day MA. If the market is rising, but fewer stocks are above their 200-day MA, this divergence often signals a potential reversal. Acting on this insight can help you enter or exit positions at more opportune moments, maximizing your gains while minimizing risks.

Enhance Your Trading Strategy

Problem: Your strategy lacks an effective filter?

Solution: Integrate the percentage of stocks above the 200-day MA into your existing trading strategies as a filter. For example, only take long positions when 60% of stocks are above their 200-day MA, or short positions when below 40%. This filter raises the probability of success because it aligns your trades with broader market trends, ensuring you're swimming with the tide rather than against it.

9 Stock Characteristics to Look Out For to Signify Market Trends

As a stock trader, it's essential to identify trends that signify changes in the market. Observing specific characteristics can alert you to potential bullish or bearish trends, helping you make informed decisions. In the Trade Lion podcast titled “How to Know the Best TIME to SELL,” Chris Perruna discusses using market breadth as an indicator along with the 200 day moving average.

Rising Above The 70% Threshold

"When stocks reach about 70% or more above the 200-day moving average, it might be prudent to consider taking profits or reducing exposure." This suggests that stocks trading significantly above their long-term average may be vulnerable to profit-taking or corrections.

Pay attention to stocks with a high percentage rising 70% above their 200-day moving average, potentially indicating a need for caution or strategic profit-taking.

Falling Below 25% Threshold

"The number of stocks below their 200-day moving average will start to drop as well." This indicates declining market breadth, suggesting a potential market decline.

The percentage of all stocks on the NASDAQ trading above their own individual 200-day moving average is a crucial indicator. When this starts to drop below about 25%, it indicates that the market is losing strength and might enter a correction phase.

Look for a percentage drop below 25% of stocks trading above their 200-day moving average to anticipate market corrections.

Falling Below 15% Threshold

"When that drops below 10% or even 15% I use most often, it means we're actually now going into what I call a bear market." This sharp decline often signals a transition to a bear market.” By the end of the year, it got to about 25%, and by the middle of 2022, it dropped to single digits, which usually marks the bottom of a bear market.” A further drop to single digits often points to a severe market downturn.

Identify markets where the percentage of stocks trading above their 200-day moving average falls into single digits. Watch for drops below 10%-15% in stocks trading above their 200-day moving average to anticipate bear markets.

Rule of Thirds

"Data shows that more than a third of all stocks hit their top prior to the market top, a second third make a top at the same time, and then the last third either don't top out or will eventually top out after the market does as well." This staggered topping pattern requires watching multiple levels of performance.

Examine stocks that top out at various points relative to the market top for signs of market weakness.

Market Breadth Paired with New High-New Low Ratio Both Declining

"Couple this with the new high-new low ratio; if both indicators start to decline, we’re likely heading into a downtrend or a bear market." This combined indicator is a strong signal of an impending market downtrend.

Track the new high-new low ratio along with the percentage of stocks above their 200-day moving average for a comprehensive market trend analysis.

Market Breadth and Index Divergence

"NASDAQ was still making highs in late 2021, but these indicators were making new multi-year lows." Divergence between market highs and these indicators can signal an impending correction. "That's what happened at the end of '21 going into 2022; we had a market that also had a divergence as well." Recognizing divergence early can help you prepare for market corrections.

Look for divergence between market indices and individual stock performance to anticipate potential market failures.

By closely monitoring these 12 characteristics, you can better navigate the stock market and make more informed trading decisions.

New High-New Low Ratio Declining

"Couple this with the new High new low ratio; if both of these indicators are starting to actually decline, most likely we're going to start to head into a downtrend." This combined indicator is a strong signal of an impending market downtrend.

Track the new high-new low ratio along with the percentage of stocks above their 200-day moving average for a comprehensive market trend analysis.

Market Breadth Thresholds

“When the percentage of stocks below their 200-day moving average gets below 25%, meaning 75% are now below their 200-day moving average, the market is likely entering a correction. When this drops below 10% or 15%, it often signals a bear market, which can be a good time to start accumulating stocks.”

Watch for key thresholds like 25%, 15%, and 10% of stocks below their 200-day moving average.

Market Cycle Considerations

"Stocks in a stage two market cycle that are extended above their 200-day moving averages may pull back but are less likely to enter a prolonged decline." This indicates that stocks showing strength in a supportive market environment may experience temporary pullbacks before potentially resuming upward trends.

Identify stocks in stage two market cycles trading significantly above their 200-day moving averages, assessing potential pullback opportunities within broader market trends.

Key Takeaways:

• Threshold Awareness: Stocks rising above 70% of their 200-day moving average may be overbought, signaling potential for profit-taking or correction, requiring traders to act cautiously.
• Market Strength Indicators: When less than 25% of stocks trade above their 200-day moving average, it suggests weakening market strength and potential corrections, guiding traders to anticipate market downturns.
• Bear Market Signals: A drop below 15% of stocks trading above their 200-day moving average typically signals a transition into a bear market, prompting traders to brace for severe downturns.
• High-Low Ratio & Breadth Decline: Declines in both new high-new low ratio and market breadth indicate likely downtrends, serving as strong bearish signals for traders.
• Divergence Recognition: Identifying divergence between market indices making new highs and individual stock performance can signal impending corrections, aiding in early preparation for market shifts.

PRINCIPLE:

Market breadth, combined with the 200-day moving average, can serve as a leading indicator, often foreshadowing broader market trends and potential changes in the index.