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Candlesticks with Moving Averages

 

 

Moving Averages act like magnets for the stock prices. They will function as support or resistance just like trend lines and trend channels. The most important moving averages (MA's) are the 50 simple moving average (sma) and the 200 simple moving average (sma). These sma's are a powerful tool to be used profitably by a technical trader. They provide an essential part of the trading procedure- a target.

Notice the influence of the sma's in the chart of WY. The price breaks the 50 sma at point A on good volume. This essentially sets the downtrend scenario. When a MA is broken, it will usually be tested on the other side. If the MA was previously support, it will function as resistance after the break. If it had acted as resistance, then it will function as a support after the break. Point B shows a test and failure at the 50 sma. Next, the 200 sma is broken (Point C) with a gap down - strong force on the bearish side. Point D shows testing and failure of the 50 sma again. The stock breaks the 50 sma at Point E on good volume. It tries to rally towards the 200 sma, but retreats and tests the 50 sma, this time as support. Next target - the 200 sma again. Point G shows congestion trying to break through. It fails, but Point H provides good support at 50 sma. Finally, the stock breaks through the 200 sma with a big bullish engulfing candle. The 200 sma is immediately tested for support at Point I.

Pull up charts of various stocks and see how the 200sma and 50 sma influence them. It will help you to put a piece of the trading puzzle together.

Chart courtesy stockcharts.com