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The One Indicator that the World is Watching - True Edge Trading

The One Indicator that the World is Watching

With so many technical indicators available, it can be hard to determine which ones you should be paying attention to. But if there was just one indicator you could use, it should be the 200 Period Simple Moving Average. Why? Because everyone else is watching it!

A Simple Moving Average (SMA) is constructed by taking the sum of the values of the latest n periods and then dividing by n.  For example, a 50-period Simple Moving Average would take the sum of the close price for the last 50-periods and divide by 50. But the most common SMA used is without a doubt the 200 Period SMA.

The 200 Period Simple Moving Average is referenced not only by technical analysts, but it is often referred to on financial websites, television stations like CNBC and Bloomberg, and even more mainstream news services. It is applied to just about any security as it helps us determine the trend direction and potential trend changes. The world is watching the 200 Period SMA, which means that we should too.

A 200 Period Simple Moving Average plotted on the Dow Index.

The image above shows a 200 Period SMA plotted on a chart for the Dow Index. Let’s start with point A. In July and August of 2019, the 200 Period SMA provided support for the index. We saw this happen again at point B. The index value tested the 200 Period SMA in early October and once again the moving average served as support.

Now we have point C. When the market started tanking in February of 2020, the index knifed through the 200 Period SMA, but it did return about a week later. This time, the 200 Period SMA was honored as resistance.

So what about now? Well, even though the Dow rose above the moving average recently, it is resting just below it after testing it in yesterday’s session. Watch this indicator closely in the next few days. A decisive move above or below the 200 Period SMA will be noticed by all. By watching for the index’s reaction to this important indicator it will help us know what the rest of the world is thinking, and help us make smart trading decisions.

Jeff Drake
True Edge Trading