I have already presented some basics how to use moving averages and how to calculate them. Today, I want to show you that we can also use this technique to look for resistances and supports.
Wasting time is not the way to go, so let’s take a look at some examples:
S&P500 - SMA15 supports multiple times.
S&P500 - SMA30 supports sometimes together with SMA15, sometimes after price breaking SMA15
NIKKEI - SMA 50 - Acts both as a strong support during May and June 2007 and resistance since December 2007
Dow Jones Industrial (Candlestick chart) - SMA30 - works not only with closing prices but also with lowest prices.
As you can see, moving averages as a supports and resistances are quite good to use when analyzing indexes. In general, this technique works better on shares with higher volume. Why? When there are more transactions and more experienced investors, it is difficult to artificially make a strong price fluctuation that would cross moving average. Moreover, there are more investors who also use this technique. They are looking for similar places as a supports and resistances and they are placing orders based on this.
It is very interesting what price we should take for such analysis. Usually, I take closing price as it is most important price. But very often the lowest or highest price during day touches certain moving average and since then the price continues movement in opposite direction. This you can see very often on candlestick charts. You shouldn’t also expect that price will always precisely touch moving average. Stock market is not a pharmacy.
Which moving averages to use? I prefer 10, 20 or 15 for short term; 30, 45, 50 for average term and 100, 200 for long term analyzing.
Remember, you shouldn’t use only one tool for investing. Support it with something else. In this case, it is very good practice to look also for candlesticks that signal a new direction of price movement.
