Markets find Support at Moving Averages

Jun 27, 2007: 6:36 PM CST

It’s rare when a particular moving average will capture (halt) the price action exactly, but these averages often serve as areas of support or resistance.

Today’s action was no exception; in fact, the Dow tagged the 50 period MA and the Nasdaq ‘tagged’ the average almost to the penny before rallying sharply to close up 1.2%.

Here are unedited charts – focus only on the price interaction on the moving averages (particularly the 50 day moving average):

dow-june-26.jpg

nas-june-26.jpg

I know there are many critics to using moving averages as support or resistance and that’s fine. What matters is what works for you and what you can interpret and execute in the market.

For example, the S&P 500 closed above the 50 EMA, but not before a significant ‘rinse and wash’ below it.  It’s evidence that markets don’t always do as expected, and those seeking ‘absolute perfection’ aren’t rewarded often.

spx-june-27.jpg

Using moving averages on higher time frames for execution/position management on lower time frames can indeed provide low risk/high reward zones when they hold (key word = when).

If you’re not using moving averages in this way, it’s worth pulling up a few of your favorite charts and viewing the 50 period exponential (or simple) moving average, as well as the 20 period exponential (and simple) moving average. Do your own research and see what you discover.

2 Comments

2 Responses to “Markets find Support at Moving Averages”

  1. ztrade Says:

    curious why u didnt mention the spx close finished right below its 50 day?

  2. Corey Says:

    Thanks ztrade for the comment.

    I posted the S&P chart using the same settings as above. The index closed above the 50 period exponential moving average, yet closed just below (at) the 50 period simple MA.

    I prefer to use the 50 EMA simply because I’ve found it works best for me in capturing price moves within a reasonable range. Some use the 40 period MA.

    It’s very much an ‘art’ rather than a science, and it comes down to consistency and risk management when what we expect to happen doesn’t materialize. After all, moving average analysis is just another tool in the bag to use and not recommended as a complete trading system.