Moving averages are a technical indicator for price movements. They are averages of the closing prices of stocks over varying durations-long term, mid-term to short term. For example, there can be a 200-day, 100-day, or 50-day moving average, based on what investors want to infer about the prices. A 100-day Moving Average (MA) is the average of closing prices of the previous 100 days or 20 weeks. It represents price trends over the mid-term.
Importance of a 100-day Moving Average
A moving average over 100 days helps investors see how the stock has performed over 20 weeks and to find the price trend if it is upward or downward. This gives them a sense of the market sentiment as well.
Calculating a moving average is pretty simple. You add up the closing prices of all the days (day 1+day 2+ day3…day n) and then divide the sum by the number of days. So for 100 days, the MA value of n will be 100.
Clear View Of a Price Action
Stocks are volatile securities where prices change every single day, and even from minute to minute. The most basic yet essential application of a moving average is that it helps distil the noise in the price movements that occurs daily, and gives you a sense of the direction in which that stock prices may be headed. The impact of the daily price movements is then ironed out when average closing prices are considered.
A Medium-Term Price Analysis
100 days moving average of stocks gives you a clearer picture over the medium-term period. If the MA trend line is seen moving up sharply, it shows that overall prices are upward bound, though it may also mean that prices are nearing a peak and may soon see trend reversal. If the trend line is seen moving downwards sharply, it may mean that prices are seen declining and may quickly bottom-out before they start recovering again. A trend line moving sideways primarily indicates the prices are moving in a range.
A Sense of Market Sentiment
Moving averages give you a glimpse of the market sentiment. If the prices of securities are trading above the 100-day average, the market can be said to be bullish. If the prices are trading below the moving average, it is a bearish market. But different MAs may indicate varying directions of the price. That is why investors use crossover MA trading strategies, where multiple MAs of various durations are considered at once. So, if a shorter moving average, say 50 days MA crosses over a long term MA like say 200-day moving average, then it is indicative of bullish sentiment. If the shorter moving average trails below the longer-term MA, it indicates a bearish market sentiment.
100-Day Moving Average As Support And Resistance
Investors also use the 100-day MA as support and resistance levels. So they may set up their limit orders to buy a stock when stock prices breach the level of support that lies on the moving average over 100 days before it bounces off the MA trend line. This moving average may also offer a good resistance level at which traders can set sell-limit orders. The MA doubles up as ceiling for stock prices before sell-limit orders may be triggered.
Moving averages over 100 days are an essential intermediate indicator of the direction prices are moving in. You can identify 100-day moving average stocks that have been performing well over the medium term, and make trading decisions.