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Stock Analysis using Moving Averages

One of the fundamental concepts behind technical stock analysis is the idea of support and resistance. Moving averages can help you see this in a stock’s chart by smoothing out the noise and highlighting the support/resistance points. Stock market prices today aren’t enough – moving averages let you see the trend. Let’s walk through this concept and how to use it in Stock TickerPicker.

Stock prices are fundamentally about supply and demand. So when a stock’s price falls to the point where demand matches supply, the stock will bounce up off this price – this is the stock’s support. On the other hand, if a stock’s price is rising, it will eventually hit a point where demand matches supply, and the stock will find it challenging to move higher – it is hitting resistance. If you can uncover the support and resistance points (which can change fluidly over time), you can trade around this.

Moving averages help you spot support and resistance. They take the average price of the stock over some period of time (often the past 20 days, or 100 days) and plot it on top of the price movements, so you can see how the average changes. 100 or 200-day moving averages are slow-moving (since a lot of data points go into the average), and tend to indicate long-term support/resistance. Shorter-term moving averages help you be more nimble by highlighting short-term trends. Moving averages can even be combined on one chart, with some technical analysis focused on the convergence or divergence of moving averages.

Here’s an AAPL chart from Stock TickerPicker for iPhone, with the 20-day and 100-day moving averages turned on. The 20-day Simple Moving Average (SMA) is in purple, while the 100-day SMA is in orange. You can see that Apple has been in a holding pattern lately, and whereas a few months ago it was well above it’s 100-day SMA (making new highs), it’s 100-day SMA has now come up and it is barely above it. It’s 20-day SMA shows this even more clearly, showing how it has been stagnant lately.
Found this article helpful? Let us know what other technical analysis questions you think we should write about!

 

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