QUICK QUOTES
Nothing Good Happens Below the 200 MA
In our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we note some famous quotes regarding the stock market, investments, and financial astrology, from the likes of Warren Buffet, J.P. Morgan, Donald Reagan, and others. The quote “Nothing Good Happens Below the 200-day Moving Average” was a statement by another well-known financier and trader, Paul Tudor Jones.
Ever since the advent of technical analysis trading, Moving Averages (MA’s) have been utilized as a foundation for the concept of market timing. As their concepts tend to work in any time frame, they are very useful for all investors and traders, though they are a bit of a “lagging” indicator. Thus, the longer the time frame of the MA, the more legitimacy the connected trend will be. For example, the trend within 200 days would be more valid than that of 50 days, 8 days, 1 day, or 1 hour, as the sample size used to formulate the average decreases with each lesser time frame. As a result, the longer the moving average, the more strength the line, or trend, is considered to have.
The basic premise of this Mr. Jones’ quote, was that any stock or asset whose value have descended below their 200-day moving average price, considered a very powerful indicator, has entered a “danger” zone where one may choose to sell, or at least be patient before buying. This major support or resistance line is difficult to break, or reverse, but once it does serves as a barometer for when to buy or sell. There are many gurus of investing whose first lesson is to buy when a stock crosses above the 200-day MA, and sell when it crosses below.
Shorter term traders find their strategies effected by daily company news, events including earnings announcements, mergers, and analyst upgrades/downgrades, and global issues, such as tariffs, military conflicts, and product shortages/supply chains. As a result, swing and day traders often use shorter period moving averages (like the 5, 8, 20, and 50-day) in their attempts to “time” the markets for the short term.
Longer term investors with a much longer time horizon, however, often choose to use the 200-day moving average as their basis for long-term trends. These individuals normally consist of dividend seekers whose goal is to compound their interest payments over time, and those who choose not to trade or follow their investments in shorter time frames. They are active enough, however, to recognize when a long uptrend is vulnerable, or reversed, that they may want to utilize funds for another opportunity, rather than wait long periods of time for a recovery (that may never come).
Additionally, the 200-day moving average is a “line in the sand” that many institutions and algorithms currently use to stop buying (in a downturn) and stop selling (in an upturn). These professional traders have the power to move the markets, and it is an important fact for the average retail investor to know when they likely will not be “buying the dips” in price. Since this indicator is a strong sign of strength and weakness, it generally takes longer to reverse than the lower time frame MA’s. It is at those times that cash is usually held on the side to await the end of the selling pressure and begin bargain/value hunting. The Contrarian investor, as explained in our publication, will often also use these times to purchase shares of the best companies that tend to rebound the quickest.
As we are currently experienced some signs of breaking down in the markets, the 200-day MA’s may be vulnerable. Remember to develop your own plan, stick with it, and don’t let emotion affect your investing/trading strategies!
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
