200-Day Moving Average
What it is:
The 200-day moving average is a popular technical indicator which investors use to analyze price trends. It is simply a security's average closing price over the last 200 days.
How it works (Example):
You can calculate the 200-day moving average by taking the average of a security's closing price over the last 200 days [(Day 1 + Day 2 + Day 3 + ... + Day 199 + Day 200)/200].
On the surface, it seems as though the higher the 200-day moving average goes, the more bullish the market is (and the lower it goes, the more bearish). In practice, however, the reverse is true. Extremely high readings are a warning that the market may soon reverse to the downside. High readings reveal that traders are far too optimistic. When this occurs, fresh new buyers are often few and far between. Meanwhile, very low readings signify the reverse; the bears are in the ascendancy and a bottom is near. The shorter the moving average, the sooner you'll see a change in the market.
Why it Matters:
The 200-day moving average is perceived to be the dividing line between a stock that is technically healthy and one that is not. Furthermore, the percentage of stocks above their 200-day moving average helps determine the overall health of the market.
Many market traders also use moving averages to determine profitable entry and exit points into specific securities.