Understanding the 200 Day Moving Average

By Stock Research Pro • March 18th, 2009

Moving averages can help investors to understand the current direction of any particular stock. While short-term moving averages are used to gauge the shorter-term direction, longer-term moving averages can offer investors a more complete picture. Generally speaking, a stock that breaks the 200-day moving average on its way up is seen as being acquired, a bullish sign. A stock that breaks the 200 day moving average on its way down is seen as being distributed, a bearish sign.

About Moving Averages

Moving averages are one of the most commonly used tools for technical analysts. A moving average is the average price of a stock (or some other security) over a specific period of time. While there are a number of ways to calculate moving averages, the simple moving average (SMA), which is calculated by adding the closing price of the stock for a number of time periods and then dividing the total by the number of time periods, is the most common.

The most common time periods used in moving average analysis are 20, 30, 50, and 200 days. Among these timeframes, 20 and 30 day moving averages are seen as short-term while. A 50 day moving averages is often referred to as intermediate-term and 200 day is categorized as long-term. Longer-term moving averages are less sensitive than shorter-term. Stock charts are used to illustrate moving average data to provide a clear indication of how a stock’s price is trending over time.

The 200 Day Moving Average as an Indicator

The 200 Day Moving Average is a long term measure that can help determine overall health of a stock. When looking at the market as a whole, the percentage of stocks trading above their 200 Day Moving Average helps determine overall direction of the market. When the number gets up into the 80-85% range, many technical investors begin to see the market as over-bought and become bearish. When the number drops below 20%, the sentiment can become bullish.

In a bull market, a buying signal may be indicated as a stock price drops down toward its 200 Day Moving Average; a sell signal may be generated when it goes far above its 200 day Moving Average.

In a bear market, investors will often look for buying opportunities in those stocks that are trading well below their 200 day moving averages; a sell signal is indicated as the stock rises close to its 200 day moving average.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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