A:

The 200 simple moving average (SMA) is considered a key indicator by traders and market analysts for determining the overall long-term trend. The price level in a market that coincides with the 200 SMA is recognized as a major support when price is above the 200 SMA or resistance when price is below the 200 SMA level.

The 200 SMA is particularly popular for application to daily charts. The 200-day SMA, which covers the previous 40 weeks of trading, is commonly used in stock trading to determine the general market trend. As long as a stock's price remains above the 200 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.

As a very long-term moving average, the 200 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. When moving average lines converge, this indicates a lack of definitive market momentum, whereas increasing separation between shorter-term moving averages and longer-term moving averages such as the 200 SMA indicates increasing trend strength and market momentum.

The 200 SMA is considered so critically important a 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 a serious 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 called a "golden cross," referring to the fact that a stock is considered "golden," or nearly sure to rise in price once that happens.

It is possible there is also something of a self-fulfilling prophecy aspect to the 200 SMA; markets react strongly in relation to it partially just because so many traders and analysts attach so much importance to it.

RELATED FAQS
  1. Why is the 50-day simple moving average so popular among traders and analysts?

    Learn the various purposes the 50-day simple moving average (SMA) serves, and understand why it is commonly used by traders ... Read Answer >>
  2. How do 50-day, 100-day and 200-day moving averages differ?

    Whether you are using the 50-day, 100-day or 200-day moving average, the method of calculation and how the moving average ... Read Answer >>
  3. What are the best technical indicators to complement the Exponential Moving Average ...

    Utilize additional technical indicators to complement and improve a basic trading strategy that relies on exponential moving ... Read Answer >>
  4. How do I use exponential moving average (EMA) to create a forex trading strategy?

    Learn how to use the exponential moving average (EMA) to create a dynamic forex trading strategy. Read Answer >>
Related Articles
  1. Investing

    PTC Therapeutics $20M Milestone on Horizon (PTCT)

    PTC Therapeutics initiated a Phase 2 study for its RG7916 drug to treat Type 2 and Type 3 Spinal Muscular Atrophy (SMA) in children and adults.
  2. Investing

    Cytokinetics SMA Drug Did Well in Early Study

    Cytokinetics' spinal muscular atrophy drug, CK-2127107, improved muscle function in a pre-clinical study.
  3. Trading

    Simple Versus Exponential Moving Averages

    These technical indicators help traders visualize trends by smoothing out price movements, but they are based on different calculations.
  4. Investing

    AveXis Reports Positive Data for SMA Gene Therapy

    AveXis' spinal muscular atrophy drug, AVXS-101, reported encouraging results from a Phase 1 trial.
  5. Investing

    The P/E Ratio: A Good Market-Timing Indicator

    Check out the returns this newer technical analysis tool would've yielded over the period from 1920 to 2003.
  6. Trading

    Autozone Stock: Look for 'Golden Cross' on Positive Beat

    Autozone stock is relatively cheap with a P/E ratio of 15.91 but without a dividend. The stock is poised for a "golden cross."
  7. Trading

    How to Use a Moving Average to Buy Stocks

    The moving average (MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price.
  8. Trading

    RH Furnishes EPS Above 'Golden Cross' With Mojo

    Restoration Hardware reports earnings with an elevated P/E ratio. The stock is above a "golden cross" with overbought weekly momentum.
RELATED TERMS
  1. Moving Average - MA

    A moving average (MA) is a technical analysis indicator that ...
  2. Death Cross

    A death cross pattern occurs when a security's short-term moving ...
  3. StockCharts Technical Rank (SCTR)

    StockCharts Technical Rank is a proprietary ranking for stocks ...
  4. Inside Days

    Inside days refer to a candlestick pattern that forms after a ...
  5. Momentum Investing

    Momentum investing is a strategy that aims to capitalize on the ...
  6. Qstick Indicator

    The Qstick Indicator is a technical analysis indicator developed ...
Trading Center