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Holding the Line: The 200 Day Moving Average

Feb 12, 2018

Holding the Line: The 200 Day Moving Average

Regardless of the weight given to each method, utilizing a blend of fundamental and technical analysis is perhaps the most effective investment strategy. Fundamental analysts tend to put less emphasis on the charts and graphs that technical traders hold sacred, however paying attention to them lately may have presented a great entry opportunity for investors. This is the central idea posited by authors John Kimelman of Barron's and Lu Wang of Bloomberg in their respective works titled “Why It Pays to Follow the Moving Average” and “Chart watchers feeling for bottom of Rout Are focusing on This Line”. The recent broad sell-off across the U.S stock market resulted in widespread declines in stock valuations. Amid such volatility it can be difficult to gauge just how far equities will slide, though investors charting the market would notice an interesting development.

 

Last Friday, following a week of extreme volatility, the S&P 500 briefly dipped below its 200-day moving average. For investors who may not be technically inclined, the 200 day-moving average has historically acted as a support for the S&P 500 index. In fact, the 200-day average has supported the index during two recent critical market sell-offs, Britain’s Brexit vote and the U.S Presidential election. While the S&P tends to occasionally dip below this level, history has shown on multiple occasions that a bounce back is likely to follow suit. This was exactly what happened on Friday when the S&P slid below its support line, only to recover and end the trading session up 1.5%. Investors unaware of this trend may have sold into the dip for fear of further losses. Technical traders, however, would have seen the opportunity present as the index approached its support.

To read the Barron's article click here

To read the Bloomberg article click here