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Battle Lines for the Stock Market Generals
by Ron Griess
Proprietor, The Chart Store
www.thechartstore.com 
August 28, 2004

The 50 and 200 day moving averages of stock market indices and/or individual stocks have been a tool used by analysts for years. In this Observation, we examine the current position of these moving averages for two of the most widely followed stock market indices along with some important “battle lines.”

Chart 1 is the price action of the Dow Jones Industrial Average for 2004 with an overlay of the 50 and 200 day moving averages. We have also added two black downtrend lines, three red resistance lines, two orange circles and a black circle to the chart.

 Chart 1 NOTES: 

• The Dow entered the year in a strong uptrend and was trading above both its 50 day and 200 day moving averages.
• The Dow began a correction phase of lower lows and lower highs after peaking on February 19. We have drawn two black downtrend lines connecting the high for the year and the next two lower highs.
• The Dow has broken below its 200 day moving average on two occasions as shown by the two orange circles.
• Recent trading action has found the price moving back above the first downtrend line and just below the 200 day moving average.

Chart 2 is the price action of the S&P 500 Composite for 2004 with an overlay of the 50 and 200 day moving averages. We have again added two black downtrend lines, three red resistance lines, two orange circles and a black circle to the chart.

 Chart 2 NOTES: 

• The S&P also entered the year in a strong uptrend and was trading above both its 50 day and 200 day moving averages.
• The S&P began a correction phase of lower lows and lower highs after peaking on March 5. We have drawn two black downtrend lines connecting the high for the year and the next two lower highs.
• The S&P bounced off its 200 day moving average on one occasion and then traded below the 200 day moving average as shown by the two orange circles.
• Recent trading action has found the price moving back above the first downtrend line and just below the 200 day moving average.

 SUMMARY POINTS 

• The 200 day moving averages for both the Dow and the S&P are still moving higher.
• Both indices are challenging the 200 day moving average from below.
• Both indices are between two downtrend lines.
• Both indices have “overhead” resistance areas represented by the horizontal red lines.
• The battle lines seem to be drawn and the area represented by the black circle is an important area to watch.

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