The 200 day moving average is the one moving average indicator which has the most weight out of all moving averages. More precisely it is the 200 bar moving average, so that it applies to all kinds of time frames and charts, from hourly to weekly. And traders pay particular attention to this 200 bar moving average as a main gauge for measuring strength in the markets. The 200 bar moving average has most significance on the daily and weekly time frames though, especially on the daily market trend, because all fund managers and institutional traders almost never trade against this average. More specifically, they only buy stocks when these stocks and the main indices trade above their 200 day moving averages, and they sell when these stocks trade below this level.
The only exception to this 200 day moving average rule, as made by all money managers is when stocks have been at extremely low levels and a reversal is due to happen. In such cases stocks will be far below their 200 day moving average, and money managers will still step in and buy these stocks. So at times of extreme lows or extreme highs, but more often it is the case of extreme lows, money managers break the 200 day moving average rule and trade against it.
The 200 bar moving average serves as an indicator of sentiment, when the market is below this average, there tends to be a continuous wave of selling. Even on the hourly market charts, the 200 hour moving average is collectively respected by 1000s of traders, resulting in a dynamic level of support or resistance. The importance of all 200 bar moving averages becomes particularly great when traders pay attention to both the 200 day moving average as well as the 200 hour moving average. These two indicators together can work well, as the 200 hour moving average will be fast moving and will confirm any suspected change of trend on the daily chart, early enough, before market price crosses the 200 day moving average.
Apart from actual market levels and the values of these averages, traders also pay attention to the their slope, that is whether or not the actual average is rising or falling, or just slowing down. The slope of the 200 day moving average is just as important on the daily market charts as the average itself. When the 200 day moving average slope is for example rising steadily the market remains in an up trend, even if market price briefly falls below its 200 day moving average. In this case it is useful to analyse the market from the perspective of swing point analysis to further confirm market direction. But at first glance, if the slope of the 200 day moving average keeps on rising, it does not matter if market price falls below for few days, chances are it will rally all the way back up. And the same is true for down trends of course.
Sometimes the market attempts to move closer, or too close to the 200 day moving average, especially during sideways trading action and periods where trend momentum is lost. In such cases the market will attempt to test the moving average, testing means that it will simply touch the moving average, there is no way of knowing in advance if the test will result in a successful breach, in a trend reversal, or even a false breach with a short lived, deceptive reversal.
The above chart shows the daily chart of the AUDCAD currency pair, notice how price rises near the 200 day moving average, in an attempt to test it, and then time and again it fails to breach it, and the market goes down. This happens in all markets, currencies, commodities and stocks as well. The 200 day moving average sets the major line between up and down trend, and the market will often attempt to test it. If the breach is successful and the slope of the average also changes, then the market may reverse.
There is no doubt that money managers and institutional traders respect the 200 day moving average, and not only the average itself but its slope as well. Typically, a market that has been falling as the one seen on the above chart, is unlikely to reverse if the slope of the 200 day moving average is too steep. Reversals tend to happen when the slope of the average becomes more level, or during extremely volatile times where a series of false breaches will take place, despite a steep or flat slope. On the above chart, all failed attempts to penetrate the 200 day moving average come at a time when the slope is at around 45 degrees, typically in such cases the moving average will not be penetrated. The purpose of testing the 200 day moving average is unclear, it is simply the result of collective trading action, and in the case of the above chart it offers a better selling price to traders willing to sell the market again. Markets also tend to get very close to their 200 day moving average during corrections, while the main daily trend remains intact.
