Moving Averages - the 20, 50, and 200 day simple moving averages (SMA)

[Shiv Naimpally]

I find displaying simple moving averages (SMA) on a stock chart to be very useful. This indicator is universally available, even Yahoo Finance's web page can be configured to show SMAs. Some people use exponential moving averages (EMA), but I have found good results with the SMAs. For a long time, the two SMAs I used were the 50 SMA and the 200 SMA. It is quite interesting to see stocks use these as support or resistance levels, depending on where they are - look for declining stocks that are above an SMA to find support at an SMA and stocks going higher that are below an SMA to find resistance at the SMA. Often, a stock will break below support at the 50 (e.g., earnings miss) but find support at the 200. On the stock chart, this may end up being wave 4. 

One SMA I have recently added is the 20 SMA. The 20 SMA is useful for faster moving (e.g., more volatile) stocks. Stocks will often pull back to the 20 SMA before going higher, so finding support at the 20 SMA can provide a good place to enter into a trade. 

When people talk about "reversion to mean", this means that the stock tends to get pulled towards an SMA. Over-extended/over-heated stocks tend to undergo a minor correction that brings them down to the 20 or 50 SMA before they resume their upward journey. Similarly, beaten down but otherwise relatively strong stocks tend to move up towards the SMA, though they may make a few attempts before breaking above the resistance of the SMA. If a stock is paying a good dividend, a longer term swing trading strategy is to buy the stock and collect the premiums (and possibly sell covered calls) until the stock recovers. I did this a few years back with ABBV and QCOM stock (not options). Both were beaten down and paying 5+%. When QCOM settled their lawsuit with AAPL, the stock shot up. Menawhile, ABBV marched up and delived some nice dividends in addition to the captial appreciation.

Edited November 16, 2021 by Shiv Naimpally