In active trading, there are hundreds of indicators to choose from, but few have proved to be as objective, reliable and useful as the moving average. This tool is used by traders to track changes in the trends of financial assets by smoothing out the day-to-day price fluctuations, or noise. Once the price of an asset falls below an influential level of support, such as the 200-day moving average, it is not uncommon to see the average act as a barrier that prevents the bulls from pushing the price back above that average. A move toward the 200-day moving average when the price is in a downtrend, as shown in the chart below, is often used as a sign to take profit; many short sellers will use these averages as entry points because the price often bounces off the resistance and continues its move lower.
Let's take a look at a few companies that are in the process of testing the resistance of their respective 200-day moving averages. Traders will expect the downtrends in these stocks to continue until the price is able to make a sustained move above the identified barriers.
Cooper Industries Ltd. (NYSE:CBE) - Taking a look at the daily chart of CBE, you'll notice that the bulls have staged an impressive rally since March. Given the nearby resistance of the 200-day moving average (pink line), it may be wise for the bulls to remain cautious about the future direction because a bounce off this level could send the price lower again. It is also interesting to note that the price found support at the $47 level beforehand (shown by the black arrows). This is technically significant because this level of support has reversed its role and is now acting as a level of resistance. I've also attached the MACD indicator to the bottom of the chart because it recently crossed below its signal line. This bearish crossover confirms the strength of the nearby resistance and it suggests that the bears may be getting ready to send this stock lower again.
Biotech HOLDRs (AMEX:BBH) - BBH is another chart that is testing the resistance of a nearby 200-day moving average. The downward sloping average suggests that the bears are in control of the longer-term direction and many bulls will want to wait until the price closes above the average before taking a position. You'll also notice the descending trendline, which will be used to confirm the conviction of the downtrend. A company that has a similar chart to the one shown below is Computer Sciences Corp. (NYSE:CSC). This company is also worth mentioning because traders who hold shares may want to take note of the nearby resistance, which could control the longer-term direction of the stock.
Embarq Corp. (NYSE:EQ) - EQ is another company that has a stock price nearing the resistance of its 200-day moving average. A bounce off this long-term resistance level could cause many bearish traders to set their target prices near the March and April lows (shown by the blue dotted line). The bearish crossover on the MACD indicator, shown at the bottom of the chart, is a common technical sell signal and it will likely be used to confirm the strength of the nearby resistance and to predict a period of short-term weakness. The bulls have their work cut out for them if the want to see the long-term trend shift upwards.
For more on moving averages see:
Moving Averages Tutorial
Basics Of Moving Averages
Moving Average Explosions