Moving averages are often used by technical analysts to smooth price action in order to help them identify trends. Sets of short and longer term moving averages can also be compared with the price and used to determine when the price action or medium term trend is in the process of reversing the longer term trend.
Such a reversal might be signaled by the price or medium term moving average crossing over the longer term average. When performing a moving average analysis of this type, many technical traders watch 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.
Given this popular system of trend analysis, traders observing a stock trading just above both its 50 and 200 day moving averages could take a long position or cover shorts with the view that the market is just experiencing a temporary short term downward correction within its overall upward trend. Ideally, the 50 day moving average will still be reading higher than the 200 day moving average to support this bullish view.
Before making that trade, they might watch for confirmation in the form of buying activity emerging near the closer of the 50 or 200 day moving averages. Looking for bullish reversal signs appearing on momentum indicators like the Relative Strength Index or RSI would also make sense. In terms of risk management, they could place sell stop orders just below the level of the closest moving average, just in case the trend is in the process of reversing.
This section provides the results of an algorithmic scan of the stock market to identify which stocks are currently trading just above both their 50 and 200 day moving averages.
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