A historic peace meeting between U.S. President Donald Trump and North Korean leader Kim Jong-un coupled with a positive economic outlook that caused the Federal Reserve to raise interest rates last week was trounced by escalating trade tensions between the U.S. and China–all news sending markets on a volatility roller coaster ride that could now have the Dow Jones Industrial Average end in the red for the seventh straight day.
It’s easy for investors to get caught in the crosshairs of geopolitical news, causing them to sell off investments in a frenzied environment. However, when looking at a moving average, a technical indicator that aims to smooth out the price of an investment by filtering out the market noise from volatility, it reveals that the Dow is not in as much turmoil as the news purports.
The moving average, known as a lagging indicator because it focuses on past prices to identify a trend, is showing an upward trajectory. In particular, the 200-day moving average, represented in the purple line in the graph below, shows that the Dow is moving above the average despite all the gloom and doom in the latest market news.
A closer look at the S&P 500 below also shows that is currently above its moving average as well, but worry could ensue if it does break below the moving average. According to Jeff Tomasulo, Vespula Capital Founder and CEO, “To me, if we get a close below the 20-week moving average, the likelihood that we go test those lows are higher than it would be.”
In the meantime, unless technical indicators like the moving average warrant concern in the markets, it’s best to muffle the geopolitical noise.
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