Everything about the stock market and individual stocks is tracked for the benefit of stock analysts and just the average investor. There are so many measures and indicators that could be applied to any individual stock that it is mindboggling.
All are key data points that allow investors to fully scrutinize a stocks volatility, quality, value and potential future movement.
Some of these measures include the stock’s price to earnings (P/E) ratio, its price to book (P/B) ratio, the dividend yield, the earnings per share (EPS) or the price to earnings ratio to growth ration (PEG), just to name a few.
Many measures illustrate the stock’s true worth compared to similar stocks and other measures indicate its volatility compared to similar stocks and the broader market. There are other indicators that can show investor’s interest in the stock, how it is valued and whether or not it is fairly valued.
One technical indicator that is very useful to investors and market analysts is the 200-day moving average. It can be plotted on a chart and tracks the price movement of the stock over the previous 200 days.
Analysts and investors look for trends in a stock and the 200-day moving average can give them an indication that can aid them in buying or selling decisions. They often combine the 200-day moving average with the 50-day moving average for more indications of a trend; looking for where the two might intersect and the direction of both.
The longer-term average allows an investor or analyst to filter out the variables that influence short-term price movements, which may be caused by temporary conditions.
Analysts can look at any time frame, when determining the appropriateness of a stock for long or short-term investors. They can choose averages based on 10, 20, 50, 100 or 200-day periods and break out price movements into just five-minute intervals or daily or weekly snapshots on a chart. The time frame chosen is called the “look-back period.”
Two levels that traders or investors key in on are the support and resistance levels. They focus on when the stock might be above or below these levels. For instance, the 200-day moving average can sit just below more recent price movements during an uptrend in the stock’s price. In this instance, the average acts as a “support” level or floor.
Conversely, the moving average may sit just above the recent stock prices in a downtrend and the moving average acts as a ceiling or resistance level. In many cases, analysts look for the price to break through the average in an uptrend as a sign of further upward movement.
In a downtrend, breaking through the moving average could indicate further weakness in the stock price and further drops in price.
The bottom line is that the 200-day moving average, along with a number of other technical indicators, can prove to be useful tools in evaluating a stock for purchase or to sell.