The art of technical analysis is the study of price and volume changes over a defined time period and typically, a set of financial charts is used to help interpret the data. Given that only price and volume are used in the analysis, the underpinning is that all known information about a company is reflected in the price and volume of that security. A technical analysis’ value is derived from the information that directional moves in prices offer to analysts as it provides a potential trigger for action and the ability to profit from it.
One of the indicators that technical analysts monitor is the simple moving average, which is the arithmetic average of the closing price of a security or index over a defined time period. For example, we have included a chart of the S&P 500* and the 50 day (pink), 100 day (green) and 200 day (yellow) moving averages.
Source: Bloomberg
As the moving averages either cross over each other or the security price crosses over the moving averages, it may signal a potential action from a technical analysis standpoint. In this example above, the moving averages show that prices have been increasing over a one-year time period and the recent turbulence in the market has resulted in the price of the S&P 500 to breaking through the 50-day and 100-day moving averages. The 200-day moving average thus far has provided some support. The longer the moving average the longer the lag – or, said another way, the longer the moving average the longer a string of numbers (either higher or lower) that it takes to have an impact.
Some compare technical analysis to weather forecasts, as it helps set expectations of potential conditions, but things can change for the better or worse. We are not market timers and are providing this information for educational purposes. Please use at your own discretion.
*The S&P 500 is not managed and you cannot invest directly in the index. This information is for illustrative purposes only.
