The 200-day Simple Moving Average, Explained
If you're not already using this simple go-to metric, it's time to check it out.
D.R. Barton
December 22nd, 2022
Blog | The 200-day Simple Moving Average, Explained
tl;dr
The 200-day Simple Moving Average is trend line showing the last 200 days of closing prices
Institutional investors use it daily
It's a easy go-to metric that'll give you a nuanced view of an asset's long-term health
Why a 200-day moving average helps
Here’s the problem with a price-over-time chart: two people looking at it can see entirely different things.
What’s so complicated? If it’s going up, what could be the problem? Well, maybe:
It’s moving up, but not nearly as much as the market
It’s losing pace in its momentum
It’s indicating a potential future drop
All things you’d want to know. What we need is some kind of benchmark.
Enter the 200-day simple moving average (200-day SMA).
This is a trend line taken directly from the asset itself (rather than some external benchmark like the S&P500, for example). At each point along the line, it shows the average closing price in a rolling window of the previous 200 days. The result is a nice smooth trend.
Institutions—hedge funds, market makers etc.—use this line every day. You know an asset is healthy when its daily price sits comfortably above that trend line.
Analysis of the S&P500 and its 200-day simple moving average.
How to analyze the 200-day moving average
The trend gives us a much more nuanced read of an asset’s health, beyond just its fair market value.
At a glance, the moving average can tell us:
the direction of the current trend,
the momentum or rate of drop or rise of that trend
and because of its roll as a fair value indicator, it can also form support under the price of an asset or resistance above the price movement we see on a chart.
Heavily-watched moving averages like the 200-day SMA become something of a “line in the sand” and are viewed by traders and investors as important support or resistance levels.
That makes the long-term moving average a very versatile tool – a veritable Swiss Army knife in our technical indicator toolbox.
The 200-day moving average as a risk indicator
As I write this, we’re just coming off an impressive 15% pop in the S&P 500 off the October lows. If you’ve been keeping some powder dry, and see a gain like that, it’s tempting to jump right back in.
But the 200-day SMA gave us warning that many eyeballs are looking at the overhead resistance (ready sellers) still hanging above this market:
Current daily prices of the S&P500 are not consistently breaking the 200-day Simple Moving Average.
That is to say: even with a 15% climb, we’re not in the clear yet until we start to see spikes moving well above that 200-day SMA.
An easy action item for this chart: use smaller position size on an asset when a well-watched indicator like the down-sloping 200-day SMA is providing consistent overhead resistance.
Great Investing and God bless you,
D. R.
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momentum - A metric that provides the rate of change in the value of an asset over a given length of time. Momentum indictors describe how stong or weak any up or down move is. Investors who make buy or sell decisions based primarily on this metric are considered “momentum investors.”
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