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The 200 day moving average is oft quoted by analysts who are ‘sometime’ technical analysts. That is they normally talk fundamental analysis but, occasionally they take a look at a chart and say once a 200 MA is breached it is time to take action. What action?
The answer soon, but first to the chart of our local All Ordinaries which shows a 200 day MA:
Chart 1
click chart for more detail
So the 200 MA analysts would say when price or a market crosses up above a 200 day MA you buy and when it goes below you sell. So if we followed this truism we would have bought May 2004 and we would have stayed in for the next four and a half years, even though we may have come close to selling a couple of times in the big run up. If we followed the rule though we would have been in and out in August 2007 and out again in December 2007 with a lot of confusion around January 2008.
Now some investors may find this frustrating at times, especially in the last few months. If this is so, what you might use is a 200 MA but on a weekly chart as below:
Chart 2
click chart for more detail
And you would still be in! But if the market comes back to 5000/4800 as yours truly has been saying for months (you can read heaps more in www.sharesbulletin.com.au you will have to sell – yeah when investors like me and others are sitting on the sidelines waiting for blood in the streets and will just be getting set to get back in again.
So which to use? Well there is never a clear cut answer as it depends so intimately on a whole range of factors such as temperament, time horizon, available capital etc. My preference is a shorter term outlook as I don’t like giving back profits and I am happy (well read that as ‘prepared’) to pay as much tax as necessary.
But what is important is to have rules and stick to them!
Enjoy the ride
Tom Scollon
Chief Analyst
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