Technical analysts and traders often use moving averages to smooth out the price action to clarify the direction of the underlying trend. For example, a moving average analysis of this type might involve watching the behavior of the 200 day moving average to show the long term trend and the 50 day moving average to show the medium term trend, while the stock price action itself reflects the short term trend.
In addition, sets of shorter and longer term moving averages might be compared to the price action to determine when the prevailing trends are simply correcting, or when they are in the process of reversing direction. A correction would be indicated by the price approaching the medium and long term moving averages, while a reversal would be signaled by the price crossing over its moving averages.
Using this system, traders who observe a stock trading just below both its 50 and 200 day moving averages could take a short position or cover longs with the view that the market is just experiencing a brief near term upward correction within its prevailing downward trend. In an ideal short sale set up, the 50 day moving average will still be reading lower than the 200 day moving average to support this bearish view.
Before initiating a short position, they might look for confirmation such as buying activity showing up as the level of the 50 or 200 day moving average approaches. Also, watching for bearish reversal signs on momentum indicators like the Relative Strength Index or RSI can be useful. With respect to risk management, they could place buy stop orders just above the level of the closest moving average, just in case the longer term trend is actually reversing.
Please see below the algorithmic scan results for the stock market that identify which stocks are currently trading just below both their 50 and 200 day moving averages and hence could provide an interesting selling prospect.
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