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What The 200-Day Moving Avergae Can Tell You

If you are looking for a simple, clearly-defined indication of the direction the market is taking, the exponential 200-day moving average has your answer.

This moving average is a stock’s (or an index’s) average closing price over the last 200 days, with more weight given to recent data.  And it’s an easy-to-follow, long-term technical indicator.  It can tell you whether a stock (or the market) is in a long-term upward or downward trend.

And the way to follow the 200-day moving average is simple: if a stock (or an index) is trading above the average, the signal is positive and it’s a buy.  If a stock (or an index) is trading below the average, the signal is negative and it’s a sell.

To give you an idea of value of following the 200-day (blue line), the chart below of the S&P 500 shows where the average would have signaled a sell during the financial crisis, and where it would have signaled a buy to reenter the market.  The average guided investors out of the market to avoid steep losses, and back into the market to take advantage of the momentum on the upside.

ema 12-3-12

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