Investors look high and low for clues about what’s going on in the market. Fundamental data like corporate earnings largely drive what happens to stock prices over the long term. But there are often other forces in play that may confuse the issue. Using technical indicators—like moving averages—may be able to give you some additional perspectives.
For instance, if you are looking at a chart, one way to smooth out some of the data and get a better sense of a trend is with a moving average. Indeed, moving averages are among the most widely used technical indicators employed by chart analysts.
So what is a moving average?
You know what an average is—the sum of a series of numbers divided by the number of units in the list. A moving average takes the price of a stock—the closing price for a specific number of days—adds them up, and divides by the number of days. The next day, the oldest data point falls off the list and the newest information is incorporated into the calculation. There can be short-term moving averages, such as 20- or 50-day moving averages, and there can be long-term moving averages, such as 100 or 200 days.
Day-to-day the markets are volatile, so a moving average can help block out the daily noise and may highlight trends.
Support and resistance
Levels of support and resistance are an important concept in chart analysis. Broadly speaking, these are price levels that have some perceived psychological significance as a result of shifting levels of supply and demand. When a stock price bangs into certain levels, it may be more difficult to surpass. When the price is on the way up, the line is called resistance. When the price is going down, that's support: The market supports the price from falling too far because the stock is in demand.
Read more about support and resistance in the Learning Center on Fidelity.com: “Support and resistance.”
Using the moving average
If the price were to fall below a moving average, that could be considered a signal to sell. If the stock price were to rise above a moving average, that could be a signal to buy.
Crossing the streams
Using short-term and long-term moving averages together may give some insight into a shift in a trend. A golden cross is when the short-term moving average crosses up and over the long-term moving average. This can be indicative of a bullish trend, or in other words, that the stock price may be poised to move up after a period of declines. A death cross is when the short moving average crosses below the long moving average. This can be a bearish indication—or a hint that the stock price may go down after a period of going up.
We do it for you
Put away your pencils—no calculations are necessary. You can add moving averages to your charts on Active Trader Pro®, Fidelity’s brokerage trading platform. You can also add moving averages to a chart on Fidelity.com. From the stock snapshot page, navigate to the chart and select Indicators then select SMA. It stands for Simple Moving Average.
- Read our special report on Fidelity.com: “Technical indicators for young investors.”
- Visit the Learning Center for the “Beginners guide to technical analysis.”
- Find out what else you can learn from charts in the “Technical Indicator Guide” in the Learning Center at Fidelity.com.
- Read Viewpoints: “Trading in motion with moving averages” at Fidelity.com.
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