Moving averages are often used by technical analysts and traders to smooth out its price chart so that trends become easier to recognize. Traders also often compare the moving average for a particular time frame to the share price to determine whether the stock is maintaining or changing its trend within that period. Reversals in the trend are reflected by the price crossing higher or lower than the moving average.
This relatively straightforward type of moving average analysis might involve watching how a stock’s price trades relative to its closely watched medium term 50 day moving average. If the stock trades near to and below its 50 day moving average, traders could view that as a bearish signal for them to enter into a short position based on the idea that the market only rising correctively within its prevailing medium term downtrend.
Before entering such a position, traders will often seek confirmation, such as selling interest emerging as the market trades higher toward the level of the 50 day moving average. Bearish signals on key momentum indicators, such as the Relative Strength Index or RSI, are also useful for confirmation purposes.
With respect to risk management, traders using this strategy might place a buy stop order strategically higher than the level of the 50-day moving average, just in case the former downtrend eventually reverses higher.
Results of an algorithmic scan of the stock market appears on the Technical Scan portion of this website that show the stocks that are currently priced just under their 50 day moving average and therefore could present an interesting selling opportunity.
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