Nasdaq Composite Reaches Up to its 200-Day Moving Average
If there’s one technical analysis indicator that’s held in the highest regard by technical analysts, institutional traders, retail investors and the financial media alike, it’s the 200-day moving average. But the reason for this is not abundantly clear. If it was based on the number of trading days per year, that might make some sense. But there are around 252 trading days in every year, give or take a day or two.
Why is the 200-Day Moving Average Important?
What it most likely comes down to, then, is simple tradition and inertia. The 200-day moving average has been a fixture on financial price charts for a very long time. In a way, it’s become somewhat of a self-fulfilling prophecy. So many investors and institutions and media outlets are focused on the 200-day, that mass market behavior has tended to revolve around this specific indicator. Whatever the case may be, ask any market analyst or trader, and you’re bound to be told with strong conviction that the 200-day moving average has huge price significance.
How is the 200-Day Moving Average Used?
There are several ways in which this indicator is typically used by market participants:
- The slope (up or down) of the moving average can be used to inform the underlying trend.
- The position of price in relation to the 200-day (above or below) can inform whether there is a bullish or bearish bias.
- The position of another key moving average (e.g., the 50-day) in relation to the 200-day (above or below) can also give clues as to the directional bias.
- The 200-day often works exceptionally well as a long-term, dynamic support/resistance level in trending markets.
Nasdaq Composite Reaches 200-Day Moving Average
This brings us to the Nasdaq Composite market index, and its heavily traded ETF, QQQ. Of the three most popular large-cap indexes – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite – only the traditionally tech-heavy Nasdaq has just reached up to its 200-day moving average. The other two have already risen to leave their 200-day averages well behind. That being said, the Nasdaq Composite has surged by a greater percentage (around 20% as of the market close on 2/20/2019) from its late-December lows than both the Dow and S&P 500.
What May Come Next?
From a technical perspective, what does this tell us about the Nasdaq Composite and the markets in general? Clearing the 200-day moving average to the upside is like overcoming a major psychological barrier. At this point, a Nasdaq breakout above this key indicator is little more than a technicality, given that the Dow and S&P 500 have already done so. But having all three key indexes well above their respective 200-day moving averages will provide investors a certain degree of confidence that stocks are indeed back in bull market territory.
Chief Market Strategist at The Technicals
With more than two decades of experience as an equity analyst for several major research firms, Don has covered individual stocks (both technically and fundamentally) across a wide variety of sectors and industries, including tech, financial, and retail. He has been quoted regularly in key financial media like Bloomberg and Reuters. Contact Don