In 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 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.
Agilent Technologies Inc. (NYSE:A) - Taking a look at the daily chart of Agilent, 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 the bounce off this level could send the price substantially lower again. It is also interesting to note that the price fell below the moving average in early September 2008 and hasn't traded above it since. This is technically significant because it suggests that the long-term trend is still in the downward direction and likely won't trigger the interest of the bulls until the price is able to move above $20.25. A company that has a similar chart to the one shown below is Novell Inc. (Nasdaq:NOVL). 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.
Dow Chemical (NYSE:DOW) - Dow is another company that has been testing the resistance of its 200-day moving average. The bounce off this long-term resistance level could cause many bulls to take their profit off the table and send the price lower from here. The nearby resistance suggests that the short-term upside may be limited from here, which is confirmed by the bearish crossover on the MACD indicator, shown at the bottom of the chart. The downward cross between the MACD indicator and its trigger line is a common technical sell signal and it will likely be used to predict a period of short-term weakness. The bulls have their work cut out for them if they want to see the long-term trend shift upwards.
The chart of AFLAC Inc (NYSE:AFL) is also worth mentioning because it is setting up in an identical manner as that of the Dow (shown above). 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. The MACD indicator has also moved below its signal line, which suggests that the bears are stepping into this stock around the current level. Traders who hold shares may want to take note of the nearby resistance because it could control the stock's longer term direction.