This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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.
3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
FNMA $1.38 -0.36%
NG $4.45 3.20%
AAPL $94.26 -0.77%
FB $101.50 2.00%
GOOG $684.03 0.87%


Chart of I:DJI
DOW 15,914.74 -99.64 -0.62%
S&P 500 1,851.86 -0.35 -0.02%
NASDAQ 4,283.5920 +14.8290 0.35%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs