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Tickers in this Article: AET, BLL, XOM, CSC
The current bear market has driven the majority of stocks to well below their 200-day moving averages. The 200-day moving average is commonly used as the defining line between a stock that is in a bull market and a stock that is in a bear market. One of the reasons behind this reasoning is that the 200-day moving average encompasses a full year's worth of trading. Although the number of stocks challenging their 200-day moving averages is increasing, the number of stocks currently above this level is only about 10%. This means that 90% of stocks can be loosely defined as being in a bear market. The 200-day moving average generally contains most rally attempts in bear markets as sellers step in on bounces.

Often, a stock will need several attempts at clearing this average. Because it is one of the most commonly used values for a longer term moving average, a large number of traders will use this level as an area of "value" and fade the attempted breakout/breakdown. The first attempt often also comes at the heels of a strong rally, which leaves the stock overbought and extended as it gears up for this critical test.

Aetna Inc. (NYSE:AET) is a good example of a stock challenging a downward sloping 200-day moving average as the slow stochastics indicator is at an overbought level. While the overall pattern looks promising, there is a strong chance that AET will have a difficult time holding over the 200-day moving average. More likely, AET will need further consolidation before a sustained breakout.


Exxon Mobil Corp. (NYSE:XOM) is an example of a chart testing the 200-day moving average multiple times. It is becoming overbought as shown by the slow stochastics indicator getting over the 80 level, and while it could push above the average, it is unlikely to follow through much without a pullback. It would probably take a solid move over the $83 dollar level to qualify as a breakout.


Ball Corp. (NYSE:BLL) has been consolidating under the 200-day moving average after a failed test in late December. It appears to be attempting another test of this level, but has already reached overbought levels on slow stochastics before even reaching the average. While a breakout can't be ruled out, the odds favor some consolidation or an outright failure due to the stock being overbought as it reaches the top of its trading range.


The chart for Computer Sciences (NYSE:CSC) is a near mirror image of BLL's chart, except that it has reached the 200-day moving average for the second test. It is stretched to very overbought levels on slow stochastics and a pullback has followed each instance where stochastics was this high.


While being overbought doesn't necessarily mean that a breakout will fail, it does serve as a warning that the stock has already undergone a relatively strong move and that it could be susceptible to profit taking. Couple this with a test of an important level such as a 200-day moving average, and the odds start becoming stacked against a sustained breakout. While shorting into these moves is not necessarily advisable, one could watch these for a bearish candle pattern to develop, which could ignite a reversal. Do you think these stocks are ready for a breakout, or will they back off from overhead resistance? Let us know by participating in the Investopedia Community.

For more, see MACD And Stochastic: A Double-Cross Strategy.

At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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