How Technical Analysts Interpret Price Trends

By Matt Krantz from Investing Online For Dummies, 8th Edition

Technical analysts pay close attention to stocks that are rapidly rising or falling because they think trends like these can continue. Moving averages are the tools commonly used to find stocks on the move. A moving average is calculated by adding up the stock’s daily prices over a series of days and dividing by the total number of days.

The moving averages measure a stock’s average price over a specific period of time. Generally, investors pay most attention to a stock’s average price over a month (30-day moving average), three months (90-day moving average), or a 200-day moving average.

To get a stock’s moving average, go to the BigCharts home page. Enter the ticker symbol for the stock you’re interested in into the search field at the top of the screen, and then click the red Interactive Chart button. A stock chart, called the Interactive Chart, appears.

On the left side of the screen, choose the Display option and then choose the Price Display option, then select OHLC. In the middle of the screen, you see a stock chart with lots of lines. If you look (very) closely, you’ll see that each day has a vertical bar with two small horizontal lines attached to either side of it.

These are called open-high-low-close, or OHLC, charts. OHLC charts are designed to show you a stock’s range, which is where the stock started trading (the open price), how high it got, how low it got, and where it closed.

Moving averages are next. If you scroll down a little, you can see to the left of the OHLC stock chart a selection labeled Technicals. Under the Price Trends header, select Simple Moving Average from the drop-down list. Adjust the slider below the words Simple Moving Average to choose the number of days you’re interested in.

The OHLC Stock chart gets redrawn, this time with an overlay of the stock’s moving average.

Technical analysts generally evaluate moving averages one of two ways:

Stock price is above the moving average: Good, or bullish, news. Technical analysts think when a stock price is higher than its moving average, the stock has momentum in its favor.
Stock price is below the moving average: Bad, or bearish, news. The stock is beginning to break down, and technical analysts would avoid the stock.

If you’re looking for short-term trends in a stock, consider using the 30-day moving average. Longer-term traders pay close attention to the 200-day moving average. Even if you’re not a trader, the 200-day moving average is worth watching because sometimes it explains why a stock might act strangely at or around a certain price. The 200-day moving average can also be useful when looking at the entire stock market’s direction.

When stocks rose above their 200-day moving average in early 2009, it was a sign that the vicious bear market was finally over.