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Why Price Support Matters: Technical Analysis 101

3. Moving Average Support

The moving average, essentially a line that represents a stock's average price over a trailing period of days, is a very important indicator on any technical chart. Commonly, moving averages act as support and resistance, acting as price floors and ceilings depending on which side of the moving average the stock's price level is on.

Take a look at how the 200-day and 50-day moving average acted as support for the S&P 500 in late 2009.

Again, the moving average bounces aren't magic here. Instead, moving averages can act as key support (or resistance) for the same reasons that the other two flavors of support do. Again, it all comes down to supply and demand for shares.

Must Read: What's Your Trading Timeframe?


When you're looking at moving averages, it's important to remember that more days means a stronger support or resistance level. In other words, the 200-day moving average is a more reliable support level than the 50-day. Generally speaking, you want to focus on timeframes that have some relevance to a stock's price cycles -- in other words, periods that market participants are using to weigh their portfolios' performance. These are often preset in charting software.

The Value of Confirmation

Whether you're a burgeoning technical trader or an old-school fundamental investor, technicals can provide value for your portfolio by helping you get into positions at the best short-term levels.

With all the value that support can provide, it's important not to fall into the trap of believing that a stock will always obey its support levels. Markets are constantly changing, and that means that breakdowns and breakouts are inevitable. That's why it's often a good idea to wait for confirmation before taking a technical trade. In short, confirmation means that you wait for the technical pattern to be tested before you sink your money on the line. Often, abstaining from trading for a tick or two will come with a small opportunity cost but will significantly increase the number of successful trades you see.

Like nearly any element of investing, technicals require experience before you can expect to cash in on repeatable returns. So pull up some charts, and find some support.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
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