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Why the 200-Day Moving Average Matters

In bull markets, the 200-day moving average is pretty useless. But during extended corrections, it’s the most valuable indicator of all.

Stock Market Data Growth Arrow Average

The most important trend-following tool for growth stock investors is the simple 50-day moving average. You should own growth stocks that are in uptrends above it, and you should welcome opportunities to buy when those stocks correct down to that 50-day moving average. (It’s usually best if that average is rising.)

The 200-day moving average, by contrast, is of little use for long stretches of time. In long bull markets, stocks can trade well above their 200-day moving average for more than a year.

But in major corrections—and even bear markets—the 200-day moving average can be the most valuable moving average of all. That’s because just when all the news seems darkest—just when investors begin to feel that all is lost—the 200-day moving average pipes up and says, “Hey, this looks like a terrible time to sell; perhaps you should think about buying!”

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They say a picture is worth a thousand words, so let’s take a look at the following stock charts.

The 200-Day Moving Average, in Six Charts

The Dow Industrials

dow-chart-with-200-day-moving-average-12-20-23.png

The S&P Midcap (MDY)

mdy-200-day-12-20-23.png

The S&P 600 (Small Cap)

sml-12-20-23-200-day.png

The NYSE Composite

nyse-composite-200-day-12-20-23.png

The S&P 500 (Large Caps)

spx-200-day-12-20-23.png

The Nasdaq Composite (Growth Stocks)

nasdaq-200-day-12-20-23.png

The 200-day moving averages above reflect a broadening rally after a year largely dominated by a narrow rally fueled by mega-cap tech names.

Unlike most of this year, all six charts above show the indexes trading materially higher than their 200-day moving averages.

And, for all but the small and mid-caps, the 50-day moving averages have also crossed over into bullish territory (although even those two laggards are likely to flip bullish in the days and weeks ahead).

Between the dovish Fed commentary, general bullishness, and seasonally favorable conditions, the outlook at the end of 2023 is significantly improved over where it began the year.

In fact, conditions have triggered a few of our favorite indicators and are offering a green light to increase equity exposure while managing risks via position sizing, stops, or adherence to your trading system of choice.

Do you use the 200-moving average as a measuring stick in your investing? Or do you use other forms of technical analysis? Tell us about them in the comments below.

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Brad Simmerman is the Editor of Cabot Wealth Daily, the award-winning free daily advisory.