A moving average is a trend smoothing device that lags by definition. Two of the most commonly watched are the 200-day and the 50-day. The first is the rough average of a year of trading while the latter represents about a month of trading. Both represent potentially important psychological levels where investors reassess.
Nevertheless, markets tend to overshoot so looking at the region of the moving average is more fruitful than focusing on exact levels. That is particularly true since there are a number of different ways of calculating a moving average.
It’s an interesting time to think about the relevance of these moving averages. Generally, the 200-day is a useful barometer of the medium-term trend. However, during strong momentum moves, like we have seen since March, the 50-day is favoured. Part of the reason for that is because leveraged investors are incapable of tolerating deep pullbacks without liquidating positions.Click HERE to subscribe to Fuller Treacy Money Back to top