Technical analysts often use moving averages to smooth a stock’s price action so they can better identify trends. They also compare certain moving averages to the actual price action to determine whether the market is in the process of following or reversing its trend. Trend reversals can be signaled when the price crosses over its moving average.
For example, to implement this simple type of moving average analysis, you might watch the behavior of the very popular 200 day moving average as an indication of the market’s long term trend, while the price action itself reflects the stock’s short term trend.
When using this system, if you observed a stock trading just higher than its 200 day moving average, you could take a long position or cover shorts based on the bullish view that the market is just experiencing a temporary short term downward correction within its overall long term upward trend.
Before making that trade, you might seek confirmation by looking for buying activity to occur near the level of the 200 day moving average. Also, looking for bullish reversal signs on momentum indicators like the Relative Strength Index or RSI would be appropriate. For risk management purposes, you could enter a sell stop order just under the level of the 200-day moving average, just in case the upward trend is in the process of reversing to the downside.
Review below the results for an algorithmic scan of the stock market to determine the stocks that are presently trading just above their 200 day moving average, and therefore might present a buying opportunity.
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