The 200-day moving average of prices is probably the most widely-watched indicator in the market.
Like many popular indicators – there’s nothing special about it – other than the fact that it’s so widely-watched. Its popularity gives it something of a self-fulfilling prophecy effect.
Still, the beauty of the indicator is its simplicity. Without attempting to make bold predictions, the 200-moving average simply answers the question: “Is the stock more expensive or less expensive than it has been, on average, over the last year or so?”
It’s a layman investor’s question and a layman-style answer.
It also creates an agreed upon line in the sand. If a stock’s price is above the average, most investors get bullish. If it’s below, the market gets bearish.
Even better, any basic financial software worth its price (even if free) has the ability to scan through a long list of stocks, sorting them based on whether they’re above/below the average. So market participants with a bearish bias can quickly find the stocks that are already trading “below average.”
Stocks that are trading below the 200-day moving average often encounter resistance at the average. Here you see this happened with one investment I sold short in the Boom & Bust Bust Portfolio.
For two months the stock tried, but failed, to break above the 200-day moving average. Ultimately it slid much lower.
There’s a misperception amongst many investors that short selling is inherently riskier than buying stock. The good news is that’s just not the case. And if you’re only looking at the market from the long side you’re leaving money on the table.
Financial instruments move in both directions… and so should investors.
If you haven’t done so already read the Survive & Prosper issue on “Learn How To Sell Short“.