How Important is the 200-Day Moving Average?

By Lawrence G. McMillan

While I am a technician, I am the first to admit that not every form of technical analysis yields useful information.  In fact, being a mathematician, I really like to know why a particular indicator works – other than “it backtests well.”  

For example, support makes perfect sense.  A stock declines to a certainl level and bounces higher.  So, the next time it gets down to that level, other traders who noticed the bounce try buying at that level.  If it works (i.e., if it rallies again), traders will keep trying until it fails.  The fact that support then becomes resistance also makes sense, for some traders who bought before the support was broken will not sell at a loss.  Rather, they wait for the stock to rebound to their purchase price, and then they sell...

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