Moving Averages – Lesson 2
Oftentimes the 200 day moving average will act as support prior to a large gap down in price.
The price break below the 200 day moving average is typically done on higher than average volume.
Here’s Eli Lilly & Co, making a break below the 200 day moving average on higher than normal volume.
Notice that LLY tried to move back above the 200 day MA, but failed.
Juniper Networks makes a low right at the rising 200 day moving average . then breaks below. What’s interesting is the stock price rallies right back up above the moving average. This just goes to show that any method used for trading stocks is not perfect. Remember to know your exit point when trading stocks.
FYI . JNPR continued to decline through 2001, making a low of $8.900 in September (2001 high was $145.000).
Walgreen trades along the 200 day MA for approximately a month and a half before decisively breaking lower.
A different twist on the same concept . Microsoft trading well above the 200 day moving average, then opening the next day just below the MA. The open was more than
$12 lower than the previous day’s close.
Large breaks in price below the 200 day moving average usually occur on negative news. Typically, the stock will open below the previous day’s low. Traders can take advantage of these situations by monitoring stocks that are down significantly on higher than normal volume and selling short. As long as the stock closes lower than it’s open, the chances for follow through to the downside are high.