There is a concept I do not understand and I cannot find a sample response in the Q&A section. If a stock is in an uptrend, will the average value for the 200 day Moving Average (MA) be greater or lesser than the 50 MA and will the same principle hold when the stock is trending down or decreasing in price? (January 3, 2001)
Trends are powerful. Trendlines and moving averages map out a stocks' direction, and until broken, they are powerful indicators of direction. Trendlines and short term moving averages (e.g., 10 day moving average) are very strict measures of stock direction. A stock can break a short term moving average but recover. Conservative investors will sell on a break of that MVA, while others who are riding a long term position tend to hang on.
When a stock is trending up for awhile, the short term moving averages will stack up on top of the longer term MVA's, e.g., 10 on 18 on 50 on 200. When stocks are in uptrends they often use the 10 or 18 day moving averages as support, and we can enter positions on tests of those levels. That has not been the case for tech stocks, though we saw that in stocks such as UNH up through the end of 200 as it moved in a strong uptrend from March 2000.
When a stock is trending down, the MVA's will flip with the 200 on top, then the 50, the 18 and the 10. Just as when a stock is trending up and tests the 10 and 18 day MVA's on pullbacks, a downtrending stock will rise up to the 10 and 18 day MVA's and fall back.
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