Dow Trapped between Two Moving Averages

Mar 29, 2007: 11:16 PM CST

Believe in the power of Moving Averages!

While no technical indicator is perfect, or gives totally accurate signals, moving averages can provide reliable zones of support and resistance in trending markets.

Today is a unique day in the Dow Index, in that the market tested both the lower 2o period MA (for support) and the flat 50 period MA for resistance.

 

 As technicians, we say “the market is trapped between its moving averages” and imply that a breakout of the “trapped zone” must occur.  At the moment, this signals indecision and no clear direction (at least temporarily).  It is good for the market to pause after rapid mark-ups or mark-downs (recently).

If you don’t use moving averages, or don’t know how to optimize moving averages (which settings work best), then studying how price reacts when it approaches a key moving average can be a very valuable exercise for you.

I live by moving averages for various confirmation or trade entries (or stop placements) and have found the 20 period exponential, 50 period exponential (or simple, depending on preference) and the 200 period (daily) simple work the best.  Feel free to add your own comments if you find others to work.  Many people use shorter moving averages and also use them as signals of trend strength.

However you use them, always know key areas on chart time frames higher than the one on which you are trading.  Post (or interlay) higher time frame moving averages onto lower time frame charts and see how the market trades around these levels.  Often, key tests of moving averages in trending environments (view the left side of the chart) serve as entry points into a trend.

Nevertheless, it is odd that the market (Dow Jones Index) tested both moving averages to the penny today, and I wanted to bring this to your attention.

2 Comments

2 Responses to “Dow Trapped between Two Moving Averages”

  1. Babak Says:

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  2. Mousefinger Says:

    I swear by the 50 EMA and 200 EMA (sometimes the 20 or 21 EMA as well). I have found exponential MAs to be of more use to me than simple MAs, but they’re roughly the same. Cheers. =^.^=