Learn the stock market › Technical analysis: the basics › Lesson 5 of 6
The 200-day moving average
Oracle, three years
Price200-day average
Why 200 days?
Nothing in the nature of the market makes 200 days special. The number is common because it is long enough not to change with a few odd weeks and because so many people use it. The media often mention when an index falls under its 200-day average, and many programs show the line.
How the average is worked out is in the lesson on moving averages.
What did the price give from each position?
Here are all trading days for the 20 largest US companies since 2000. For each day we look at whether the price was above or below the average, and whether the stock had risen after one, three and twelve months. The Ordinary day column is all the days together. The price was above the average on 70% of days.
| Later | Above | Below | Ordinary day |
|---|---|---|---|
| 1 month | 60% | 58% | 59% |
| 3 months | 65% | 63% | 64% |
| 12 months | 76% | 75% | 75% |
After three months the stock had risen in 65% of cases from a day above the average and in 63% from a day below. On average that gave +6.3% against +6.3%. The differences from an ordinary day can't be told apart from chance.
These companies are today's largest, so they are ones that came back after every fall. That favors the days below the average. So the same count on a whole index, the S&P 500, is a useful companion. The index counts without dividends, from December 1927.
| Later | Above | Below | Ordinary day |
|---|---|---|---|
| 1 month | 63% | 55% | 60% |
| 3 months | 69% | 54% | 64% |
| 12 months | 72% | 65% | 70% |
There the index had risen in 69% of cases three months from a day above the average and in 54% from a day below, and at least one of the differences from an ordinary day is larger than chance usually gives.
How big the moves are
The days below the average are rougher. The next day's move, up or down, averaged 2.0% from a day below the average and 1.4% from a day above. So the price moves more when it is below, in both directions.
The line shows a position, not a verdict on the company. A price under the average can come from a cut forecast, a fall in the whole market or a dividend, and the line doesn't say which.
What a rule that owns the stock above the average and sells below it made, compared with holding the stock, is in the lesson on buy and hold.
Test yourself
A stock goes under its 200-day moving average. What does that mean?
More numbers are on the Oracle stock page.