We’re in Market Purgatory

02/17/2010 1:00 pm EST

Focus: MARKETS

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, says the market is at a key point, and investors need to watch the 50-day moving average to see which way it will go.

To say that the bears have been firmly in control of the equity markets during the past several weeks would be stating the obvious.

However, the sharp decline we’ve witnessed in the broad market hasn’t been straight down. The market has experienced several volatile turnaround days. In fact, the volatility we’ve witnessed over the past two weeks has placed stocks in what I call “market purgatory.”

Stocks now are trading right between their short-term, 50-day moving average and their long-term, 200-day moving average.

The 50-day moving average is a great technical tool that can help you assess the short-term bias of the market. In January the index fell below its 50-day moving average for the first time since November.

More recently, we’ve seen the Standard & Poor’s 500 index move back up towards the 50-day average, indicating that the recent selling in stocks may be over—at least in the very short term.

In times like these, when the market is basically bouncing about its 50-day average, it is really important to keep a close eye on this indicator [to] get a good read on which way this market wants to go.

The S&P 500 now trades right below the 50-day average and right above the 200-day moving average. This midway point for stocks between short- and long-term trends begets the question: what’s next?

Well, I think a great case could be made that we now are going to experience some buying that takes us back up to the 50-day average. Yet, an equally strong case can be made for further declines all the way down to the 200-day average.

My assessment is that if this market fails to recapture the 50-day moving average during the next week or two, we could be looking at a wider correction. But if we move above the 50-day moving average in the next week or two, then we will just chalk up the January selling to profit taking and normal corrective action after the huge 2009 market run.

I admit that I don’t know for certain which camp will be proven right, and until I start to see a strong trend forming either way, I recommend that you stay patient with any new money you want to invest.

Believe me, there will be plenty of opportunities to jump back into equities on the long side, or on the short side, when this market finally chooses whether it wants to keep running with the bulls, or start rolling around in the dirt with the bears.

Subscribe to Making Money Alert here…

Related Articles on MARKETS