Moving averages are one of the most important and most used technical indicators in analysis of stocks , moving averages are lagging technical indicators that is they usually lag the price still they have immense importance and are used in a number of ways to support a trading plan or trading strategy , one can use moving average in crossover strategy such as golden crossover , one can judge the market trend by looking at the slope of the moving average and one can also use the moving averages as dynamic support resistance levels or an area of value.
What is dynamic support resistance level ?
You must have heard or know what is support and resistance but there is a sub type of support and resistance which are dynamic that is they keep changing with the price , normal static support and resistance levels are by nature fixed once formed but dynamic support resistance level keep evolving with the price , moving averages act as dynamic support or resistance level for the stock market , such dynamic levels don’t always occur in every market but once established they act as an important area of value to trade from.
Which type of moving averages act as an area of value ?
Although other moving averages can also act as dynamic support and resistance, 50 and 100 day moving averages are generally considered a good area of value and also a reliable indicator of a market trend , most stocks if they form an area of value around a moving average it will around the 50 and 100 day moving averages , stocks can also find support and resistance around the 200 day moving average but the trend is considered bullish or bearish only over a large period of 1 year and there are too much deep retracements or corrections if the 200 day moving average acts as the area of value , for short term 50 day moving average is the best area of value , if a stock finds an area of value around the 50 day moving average then that stock will be considered in a good and sustainable bullish or bearish trend .
50 and 100 day moving average acting as a dynamic support
Above is a technical chart of TechMahindra on NSE , look at the yellow line which is the 50 day moving average and see how it acted as an area of value or dynamic support for the bullish trend , stock bounced several times from this area of value, one could have bought around this area of value on confirmation of candlestick pattern and would have reaped decent profits , of course a proper stop loss has to be placed below this area of value for any unforeseen break of this area of value.
Above is a technical chart of Titan on NSE , the blue line is the 100 day moving average , the stock found dynamic support or area of value in this 100 day MA and bounced several times , but each time it bounced the retracements were also quite deep indicating bullish market trend in a longer span of 6 months , one can look for candlestick patterns or other confluences around the 100 day moving average to take advantage of this type of market trend , nevertheless to say proper risk management plan need to be in place before making any trades.
50 Day moving average acting as dynamic resistance
Just as moving averages act as dynamic support they also act as dynamic resistance levels and thus indicate the continuation of the bearish trend in a stock.
Above is the chart of PNB on NSE , the yellow line is the 50 day moving average which in this case acted as a dynamic resistance level from where the stock further slided and continued the bearish market trend.
Sometimes the candlesticks can overshoot a little above or below the area of value but that doesn’t matter unless it turns out to be a breakout or breakdown and causes a change in the market trend , also 2 to 3 touches are more than enough to establish a moving average as dynamic support or resistance , of course more touches are better but look out for breakout or breakdown patterns if the stock touches the moving average too many times in a shorter time period.