Archive for June, 2010

Market levels based on moving averages–exponential or arithmetic?

Tuesday, June 15th, 2010

Much is being made of the 200 day moving average on the S&P 500 (SPX). CNBC market mavens are watching this level closely with many saying that they won’t believe the current rally will legs until the SPX breaks its 200 dma. But what they don’t mention is how they’re calculating their moving averages.

For most, it’s the arithmetic moving average. I know that because they’re citing 1108 on the S&P as the number to beat. But is the arithmetic average the correct one to use?

I think it’s a matter of preference because when I compare the two types of averages, neither the arithmetic nor the exponential seems to offer a better fit to the daily data. This is due to the fact that the time period is so long.

For some of the indexes, the difference between the two averages is fairly insignificant, but for the SPX, there is a bit of a difference, and that difference is meaningful right now. According to its exponential moving average, the market rally already has found its legs. But the arithmetic average states otherwise. (The SPX is at 1107 at this moment.)

Here’s a table comparing the arithmetic versus the exponential 200dmas for the major indexes:

             Index         Arithmetic        Exponential

              SPX                 1108                    1100

             DJIA               10325                10237

             DTX                   413                      414

             OEX                   510                    504.5

           Nasdaq            2240                   2223

Of the above indexes, only the OEX has a ways to go. (It’s now trading at 499.)

Many people love to use moving averages, but I find that support and resistance levels are more reliable technical indicators.