The 200-day moving average is used by many technicians to differentiate between long-term uptrends and downtrends. Above the moving average is considered bullish, and below is considered bearish. This line can often act as support or resistance as well. It's not quite that simple, but that's the quick explanation.
We can also measure how far price is above or below the average. It can help show how overbought or oversold a particular security may be. Below is a chart of SPY (S&P 500 ETF). The green line on the top portion of the chart is the 200-day simple moving average. Price is currently trading 14.9% above the 200-day moving average, which is displayed in the bottom pane of the chart. That is quite extended. Looking back to 2002, the blue dots on the chart plot the prior occurrences when SPY was 13.5% or greater above this average. As you can see it's not something that happens on a daily basis.
We are either entering the start of a strong bull market like 2009 where this momentum can continue for quite some time, or we are likely to consolidate and pullback, similar to 2011 and 2018. Although, 2020 has been the year for breaking records on both the downside and upside. Nothing is guaranteed in this environment. This is simply one more data point to consider when evaluating risk to reward at the current market levels. If you would like to discuss further, click here.
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