How to Use the 200-day Moving Average
Most amateur investors suffer from “paralysis by analysis.” These investors pollute their screens with too many technical indicators and backward-looking macro data, losing the forest through the trees. From my own experience, the most valuable change I made from my early investing days to today is to simplify. Rather than seeking to add indicators, strive to remove them and only keep the most powerful tools in your investing toolbox.
The most powerful indicator I have found for trend identification, risk management, and timing is the 200-day moving average. You don’t have to take my word for it; listen to the legendary billionaire investor Paul Tudor Jones:
“My metric for everything I look at is the 200-day moving average of closing prices. Generally speaking, we want to be long stocks above the 200-day and cautious below it.”
Below, I will explain three reasons to use the 200-day moving average, including:
1. Trend Identification: The 200-day MA is not magic. However, it smooths out prices so investors can quickly gauge whether a stock is in an uptrend or not. Trading in tandem with the trend will save you numerous headaches.
2. Risk Management: The 200-day provides investors with an area to trade against. Investors can cut losers below it instead of hoping for the best. (Jones shoots for a 5-to-1 reward-to-risk ratio so that he only needs to be correct in 30% of trades to make a profit)
3. Timing: The 200-day moving average can be a great timing tool because many institutions use it to add to or initiate long-term positions.
The Nasdaq 100 ETF (QQQ) is a prime example of the power of the 200-day moving average. During the 2022 bear market, the 200-day MA kept investors out of QQQ as it continuously bumped its head on it. Last year, price broke above the 200-day moving average and has found support ever since. Simply following the 200-day MA kept investors out of trouble in 2022 and kept them in the uptrend in 2023 and 2024.
Image Source: TradingView
3 Stocks Testing the 200-day Moving Average
MicroStrategy Tests the 200-day
MicroStrategy (MSTR) is Wall Street’s favorite Bitcoin proxy. The stock is retreating to the 200-day moving average for the first time in roughly a year after a breathtaking move from a split-adjusted $25 to $125 a share today. In my extensive analysis of the 200-day MA, the first tag in over a year for a monstrous stock like MSTR is a zone of high reward-to-risk.
Image Source: TradingView
In addition, MSTR has exhibited stellar relative strength versus other crypto proxies like Coinbase (COIN) and Bitfarms (BITF). MSTR is up 263% while COIN and BITF are up high double-digits over the past year. Meanwhile, MSTR has held its 2024 lows while the other two names have blown below support – a subtle sign of strength for MSTR.
Image Source: Zacks Investment Research
Buy the Dip in Arm Holdings
Unfortunately for public investors, more companies are waiting longer to go public. As a result, valuations are bloated, and there is little meat left on the bone. Arm Holdings (ARM) has proven itself to be a rare exception. The AI juggernaut has doubled since its IPO in late 2023 and is retreating to the 200-day moving average for the first time.
Image Source: TradingView
Though AI-related stocks have retreated recently, bullish options flow in ARM suggests that the pullback will likely be temporary. Deep-pocketed investors have purchased millions worth of December calls in the stock.
ARM also sports an attractive EPS surprise history. Since going public, the company has delivered EPS surprises in each quarter, with an average surprise of 22.19%.
Image Source: Zacks Investment Research
Obesity Week Looms for Viking Therapeutics
Viking Therapeutics (VKTX) shocked Wall Street in February when the company announced positive top-line Phase 2 trial results for its weight loss drug. The study found that VKTX’s drug “statistically reduced body weight at all doses compared to placebo.” Since more than doubling in a single session, VKTX has consolidated and is nearing its 200-day moving average.
Image Source: TradingView
Though VKTX has consolidated its gains for seven months and counting, such a consolidation period is normal digestion after such a robust move higher. That said, VKTX has the technical catalyst of the 200-day moving average and will present at “Obesity Week” in November, where it will unveil new data. If VKTX can prove it can take a piece of the $150 billion obesity drug market from Novo Nordisk (NVO) and Eli Lilly (LLY) the company will be ready for its next leg higher.
Conclusion
The 200-day moving average can provide some of the best long-term entry points. MicroStrategy, Coinbase, and Viking Therapeutics offer high reward-to-risk as they retreat to an important technical level.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Novo Nordisk A/S (NVO) : Free Stock Analysis Report
Eli Lilly and Company (LLY) : Free Stock Analysis Report
ARM Holdings PLC Sponsored ADR (ARM) : Free Stock Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
MicroStrategy Incorporated (MSTR) : Free Stock Analysis Report
Viking Therapeutics, Inc. (VKTX) : Free Stock Analysis Report
Coinbase Global, Inc. (COIN) : Free Stock Analysis Report
Bitfarms Ltd. (BITF) : Free Stock Analysis Report
Source Agencies
