Back in January we discussed technical analysis (blog) and in particular the Relative Strength Index also known as the RSI. There is another metric that market technicians use and even some institutional investors pay close attention to and that is “the moving averages“. The moving average is a technical analysis that measures the average price of a stock or index over a specific period of time. The actual time period that is plotted depends on the trading or investing style of the technician/investor. The most common time periods are the 20 day, 50 day and the 200 day, however, one can plot any other time period of their choice between the 20 and 200 day. So why is this important? As previously mentioned, some of the big institutional investors use this analysis (amongst other tools) to assist them in making entry and exit trades.
Let’s take a look at the most recent Nasdaq chart as a textbook example. You can see that when the Nasdaq had a sharp sell-0ff the week of February 22nd, it held the 50 day moving average. In fact, after it held support at the 50-day trend line on February 23rd and 24th, it proceeded to rally the next two days before another sharp one day sell-off. Once again the 50-day moving average provided the necessary support to keep the Nasdaq trading above its 50-day. It is clear to me that certain institutions and certain market technicians relied on this metric to deploy capital into the Nasdaq.
Once again this is a textbook example of how technical analysis can assist you in your trading or investment strategies. However, there are many times that the “moving averages” fail to hold their selected levels. Also, please note the keyword “assist” for there are many other factors and tools that market technicians consider. It is also important to remember that most market technicians prefer not to get too complicated with technical analysis and that is why I have highlighted two of the most popular indicators.
Have a healthy and prosperous week.