Definitely and because many traders and trading programs pay close attention to their level, reactions on their tests almost become self-fulfilling. By that we mean, should an index or stock correct into a key moving average, the machines kick in, placing buy orders, pushing the price back up.

What is a moving average?

A line plot of the price average over a given period. We like the 50-day exponential moving average for short-term, 200-day exponential moving average for long-term trend smoothing. An exponential moving average (as opposed to simple moving average) gives greater weight to recent prices, less weight to prices which are way back in the data series.

An example of a moving average trade…

Take the Nikkei 225 today and yesterday, it dropped into its 50-day exponential moving average, then duly popped back above it, potentially similar to the rally at the start of this month. Since February the 50-day moving average has turned from resistance to support and that is welcome news to the bulls.

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