200 Day Moving Average – Still Relevant?
Investors worldwide use the 200 day moving average. Do you?
Let’s start by explaining what the 200-day moving average is.
The 200 day moving average (MA) is, in the simplest terms, a security’s average closing price over the previous 200 days. Many investors use this as a means of trying to gauge buy-in, or sell, opportunities. The 200-day MA is what many in the industry feel is the demarcation between a company that is healthy and one that is not. Beyond just using this to predict the health of a single stock, the same measurement is applied to the whole of our markets. Traders and investors look at the 200-day moving average close of the indices to determine the health of the markets. The efficacy of the 200-day moving average as an accurate predictor of market trends seems to have been called into question in recent years, and it appears it was a more solid indicator in the first part of the 20th century. It has been waning as a single predictor of market and stock trends since, yet it is still important to many that trade and is taken as part of a composite view, perhaps where more MAs are looked at in conjunction with the 200-day MA. Technological advancements have also had an impact on why certain bellwether averages are not all that is considered any more.
Why does the 200 moving average really matter?
Many will wonder why a security, or a market’s, 200-day MA matters at all. There are many reasons, and not the least of which is every investors desire to make the trend work for them. In the end, studying all of these indicators is simply about making money, or trying to avoid losing too much. For many, a stock is considered to be in an uptrend if it has not breached the 200-day moving average.
Using the S&P 500 200 day moving average
The problem is this is a lagging indicator, but many will still look to it when trying to figure if they should maintain a long position. This average, in particular, is largely utilized by those trying to discern whether to sell or hold. For example, the S&P 500, 200-day moving average, if the stock is part of the S&P 500 index, will often times be used in conjunction with the individual stock chart in an attempt to gauge overall trending direction. This is just one of many indicators of indices that are used in conjunction with the charts of a stock that trade on that exchange.
Not always used as a buy signal
The 200-day MA is not necessarily useful for people looking for buy opportunities. What these averages do is weed out the temporary price fluctuations, and they also help to determine resistance and support levels. The MAs lag current price fluctuations because they are based on historical data. This is why they are largely useful if you are holding a position, but if you are looking for buy opportunities, you need much more timely information, like exactly what happened with the stock in the few days prior to you contemplating making a purchase. At times, however, if looking at the composite of a few different MAs, and trying to use that information to time a purchase, then a cross-over in the 2 MAs in question could indicate a buy opportunity. The 200-day MA, however, taken in and of itself will largely not be indicative of buying opportunities, largely because buying opportunities are timely and lagging information is not entirely helpful by itself.
The efficacy of using this metric as a way of determining market health has been waning since 1990. Markets and stocks have breached the 200-day MA and rebounded nicely, indicating this particular market metric is not as bellwether as it once was. By themselves, MAs may not tell us all they once did, but taking several MAs together can certainly provide a more accurate picture of how a market, or a stock price, is trending overall. The 15-day MA, for example, is the one to look at when looking for very current information.
The two hundred day moving average is still an important indicator for trend lines. Many look to it to see how smooth the slope is. Now trees don’t grow straight to the sky, but a smooth upward trend can indicate that a reversal could be imminent. If a stock is trending above is 200-day MA, yet the average itself is sloping downward, this could well mean a sell-off is coming. If current trends are above the 200-day MA, yet the trading trend is showing dips, most will trade in the direction of the underlying trend. That is where the 200-day MA chart is still a helpful indicator, as it effectively showcases how other trends are actually doing.
200 day moving average validity
The 200-day MAs were often times looked to as a way of figuring out if markets were long-term healthy, or not. With the international, and subsequent inter-connectedness, of our markets, the ability to use this as an accurate barometer for market health is no longer as valid as it once was. Things are moving much more quickly, and although it is still a venerated indicator, there are so many more indicators available now with the onset of technological advances, it is kind of taking its place in history.
Now, with the ability of most every person in the world, who has an internet connection, being able to effect trades, the flow of information has gotten hyper-frenetic. It is hard to look at something that is starting to be considered a grandfather clause in the trading book as having validity in today’s gyrating markets. This ability to effect trades so easily has also translated into fewer hold-positions in lieu of more trading.
Internet makes trading faster
Many people lack confidence in their ability to make the right decisions when trading. The internet opened up so many new opportunities for individual investors, it has been an awakening of sorts. Those that used to hold their brokers in low regard for perceived trading injustices are now being introduced to how difficult it is to navigate the markets. As much as being able to click buy or sell has been liberating, it brought with it the dubious result of having to hold yourself responsible for whatever comes from such activity.
Do Brokers use the 200 day moving average
Brokers have long provided an emotional service, advising clients who fall in love with stocks when the time has come to buy or sell. Many clients, who prefer to hold a stock, will put up a fight when it comes time to part ways with a position that has served its purpose. That being said, metrics like the 200-day MA can help a broker illustrate that the time has come to sell. It is a tool in the bag of all that trade, including those who direct others when to sell, or hold. Easy is not the task of telling someone the position they are holding, and that which they are convinced is going to put their child through college, has outlived its usefulness. This message is often times met with resistance and a 200-day MA chart that shows it is time to sell can be helpful.
The 200-day MA is always going to have its place in the hearts of many, and it is a long-term sell or hold indicator, but although stocks are still being held, there is a lot more trading. It would appear that technology is slowly rendering certain indicators only marginally useful. Technology has brought so much good to all facets of our markets, and the enhancements to trading operations have been so useful, the 200-day MA is just falling a bit short as a useful indicator. There were times when traders would have to depend on that to determine when the time had come to make a move, yet they may still look at it, but they look at a bunch of other indicators as well now. It has become the cornerstone of a composite view of how a market or a security is doing, but that which takes into consideration several other indicators as well. It has its place in the bevy of tools traders use, and now it has a bunch of back-up singers as well!