Technical Analysis 101: Utilizing the 200 SMA to take Profits
- Miguel Ferreir (WizDayTrader)
- Aug 17, 2022
- 4 min read
Thanks for taking the time to read today's blog post where we discuss the importance of the 200 Simple Moving Average and how it relates to the markets from a Technical Perspective. This a great tool to add to your trading arsenal!
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Tools are the Technical Analysts way of crafting a picture of the markets that fit their thesis, strategy and back testing.
Patterns combined with tools are a powerful way to predict human behavior in the markets. The buying and selling of anything that has a price (equities, bonds, commodities, cryptocurrency) that is bought, sold and plotted on a chart we will show us the patterns we utilize to make the best decisions in the market.
In addition, they provide us the opportunity to not only make better decisions, but also the opportunity to make quicker profits, enter a trade correctly while earning bigger returns (30%, 50% and even +100%) in excess of what they would be if we simply held our cash in a bank account for that cumulative period of time.
So what's a great tool that we can utilize that is very simple and effective?!
The 200 SMA or Smoothed Moving Average.
Today, we are going to focus on the market as a whole and how each chart compares to its 200 SMA. Let's take a look at the larger market Exchange Traded Funds (ETFs) and individual stocks.First we are going to look at the $SPY, which has climber over ~19% since it's June 20th bottom. It's now hitting the 200 SMA which is flat to slightly decreasing.
When the price is going against a 200 SMA that is decreasing it means the slope of the average price over the past 200 days is decreasing and can continue to remain in a downward trend.
Next, we're taking a look at the Invesco $QQQ Trust, that includes issues from the NASDAQ and NYSE, we can see that we are also ~2.84% below that 200 SMA.
Next, lets a look at the iShares Russell 2000 ETF, daily chart. Wow, look at that 2 days since its been over its 200 SMA with relative strength at 80. This chart shows that small caps have been leading the way from this rally in equities.
Someone investing/trading in $IWM is looking to get the following:
1. Exposure to small public U.S. companies
2. Access to 2000 small-cap domestic stocks in a single fund
3. Use to diversify a U.S. stock allocation and seek long-term growth in your portfolio
You can also see that a theme is starting to emerge, major indies are at or below the 200 SMA which tend to be a big inflection point in the markets if we fail them, especially as the majority are downward sloping indicating that price has had to travel a long way to make up the prior losses incurred this year.
The daily chart of $XHB, or the SPDR Series Trust Homebuilders ETF, is also right below it's downward sloping 200 SMA! Surprise, surprise! This is what we talk about when patterns exist in the market and several markets coming up against a big inflection point is no different.
Next, lets a look at the Dow Jones Industrial Average, $DIA, daily chart. Wow, look at another chart with 1 day since its been over its 200 SMA with relative strength at 75. Its +15.5% from its lows in 1 month, 3 weeks and 4 days.
So let's take a look at something different, $ECH or the iShares MSCI Chile ETF, with a flat to downward sloping 200 SMA the majority of this year. Do you see how much of a HOT mess trading this can be? Back and forth between $22 and $33, seems like a headache to me!
Next, lets a look at the Berkshire Hathaway, $BRK.B, daily chart. Wow, look at another chart underneath its flat 200 SMA with relative strength at 71 with a hidden divergence in RSI, these are areas want to be taking profits in the market as they act as resistance and what a lot of market participants use to be long/short against.
What's next?? Amazon, $AMZN, daily chart. Wow, look at another chart underneath its downward sloping 200 SMA with relative strength below 70 today with a negative divergence in RSI. Again, this looks like an area we want to be taking some profits as opposed to getting long against.
$XLF, SPDR Select Sector Fund for Financials, again a failed move higher against $36 and below it's downward sloping 200 SMA. The trend is there and if Financial cannot even get above the 200 SMA while the rest of the market is outperforming that's an issue. The one positive: we got overbought on the RSI on this move.
$XRT, SPDR S&P Retail ETF, Select Sector Fund for Financials, which seeks to provide exposure the retail segment of the S&P TMI, which comprises the following sub-industries: Apparel Retail, Automotive Retail, Computer & Electronic Retail, Department Stores, Drug Retail, Food Retailers, General Merchandise Stores, Hypermarkets & Super Centers, Internet & Direct Marketing Retail, and Specialty Stores. This ETF sounds like a big deal to me!
It failed to break it's 200 SMA yesterday and is below it's downward sloping 200 SMA. The trend is there and if retail is saying 'hey we are struggling to move over a very pivotal point in the market that's an issue! The one positive: we got overbought on the RSI on this move.
Should we take profits here? For short and long term positions, yes! Should we just sell EVERYTHING? No. Over the long term the market will trend higher, so we can raise our stops to see if these falling wedge patterns break and take more profits. For now we don't fight the market unless it tells us to. And a bear doesn't fight a bull that's larger than it's size!
We must resist the urge to hedge too much until the maket stops getting overbought.
Essex Trading Quote of the Day (#EsxQotD)
“Leave with this --> You are the CEO of your life. You are in charge of those you allow into your life. You can promote, demote, hire and fire. Surround yourself with those who lift you up and expect the most from you.."
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