The 200-day simple moving average (SMA) is considered a key indicator by traders and market analysts for determining overall long-term market trends. The indicator appears as a line on a chart and meanders higher and lower along with the longer-term price moves in the stock, commodity, or whatever instrument that is being charted. The 200-day SMA seems, at times, to serve as an uncanny support level when price is above the moving average or a resistance level when price is below it.
The 200-Day SMA
The 200-day SMA, which covers roughly 40 weeks of trading, is commonly used in stock trading to determine the general market trend. As long as a stock price remains above the 200-day SMA on the daily time frame, the stock is generally considered to be in an overall uptrend. One frequently used alternative to the 200-day SMA is a 255-day moving average that represents the trading for the previous year.
- The 200-day moving average is represented as a line on charts and represents the average price over the past 200 days or 40 weeks.
- The moving average can give traders a sense regarding whether the trend is up or down, while also identifying potential support or resistance areas.
- The 200-day and 50-day moving averages are sometimes used together, with crossovers between the two lines considered technically significant.
- While the simple moving average is the average of prices over time, the exponential moving average gives greater weight to the most recent data.
As a very long-term moving average, the 200-day SMA is often used in conjunction with other, shorter-term moving averages to show not only the market trend but also to assess the strength of the trend as indicated by the separation between moving average lines. For example, comparing the 50-day SMA and 200-day is relatively common.
When moving average lines converge, this sometimes indicates a lack of definitive market momentum, whereas the increasing separation between shorter-term moving averages and longer-term moving averages typically indicates increasing trend strength and market momentum.
Death and Golden Crosses
The 200-day simple moving average is considered such a critically important trend indicator that the event of the 50-day SMA crossing to the downside of the 200-day SMA is referred to as a "death cross," signaling an upcoming bear market in a stock, index, or other investment.
In like fashion, the 50-day SMA crossing over to the upside of the 200-day SMA is sometimes called a "golden cross," referring to the fact that a stock is considered "golden," or nearly sure to rise in price once that happens.
SMAs vs. EMAs
It is possible that there is also something of a self-fulfilling prophecy aspect to the 200-day SMA; markets react strongly in relation to it partially just because so many traders and analysts attach so much importance to the indicator.
Some traders, however, prefer to follow the exponential moving average (EMA). While the simple moving average is computed as the average price over the specified time frame, an EMA gives greater weight to the most recent trading days. That is, the exponential moving average gives a higher value to recent prices, while the simple moving average assigns an equal weighting to all values. Despite the difference in calculations, technical analysts use EMAs and SMAs in similar ways to spot trends and identify overbought or oversold markets.