Lesson Moving averages: Moving average lines are lines that use the stocks closing price for a period of time to determine a "trend" line. Moving averages can be used to determine support and or resistance as well on a stock chart. The most common moving average (MA) lines are 20, 50, 100, and 200. The 20 MA line for example draws a trend line that uses the stocks closing price for the past 20 days, the 50 MA price is the stocks trend line for teh past 50 days of closing prices. When a stock price is ON TOP of its 20/50 MA lines, we consider that trend line as a support line. Meaning the stock will likely stay on top of those lines using them as support. SUPPORT is basically a price that buyers are willing to pay for a stock if it falls. Support = DEMAND for a stock. Most people like to buy stocks just as they break above a MA line and hold that area of support and ride that stock until it hits its next level of resistance.
EXAMPLE: Here is a stock TNOG that its price per share (PPS) is on TOP of its 20 and 50 MA price. You can see each time the PPS has dipped down, it has bounced back up after hitting its 20 (BLUE LINE) or 50 (RED LINE) MA price. It used those lines as SUPPORT
When a stock is in a downtrend or the PPS is BELOW the 20 and 50 MA price line, we consider that as using the MA lines as RESISTANCE. When the price is below the MA lines and it approaches for example the 20 MA line we consider that line as a stock that has a lot of SUPPLY there, many people try to SELL when the price goes up to a MA line knowing that most of the time it will HIT that line and DROP lower again. A simply supply and demand theory.
EXAMPLE: Notice how GAXY has started a downtrend in March, each time the stock tries to rally it hits its 20 or 50 MA line and then drops down as sellers bail out from the falling stock.
What will happen over time is one of two things...Either a stock will finally fall to its BASING price and then consolidate or trade sideways for a while and build up steam. A stock like GAXY (as long as it is not diluted (s8) ) will eventually hit bottom and then slowly build up stream and rally. The first rally might hit the 20 or 50 MA line and fall down again, a stock with good strength will hit the MA lines a few times and then BREAK UP or break out. When a stock breaks through and goes UP from its MA lines, the stock has just started a uptrend. Now we look for the price to continue the uptrend. Uptrend have period of moving UP and then small dips down, usually hitting the MA price and staying on TOP of them. Remember if the price falls BELOW the MA line, then the downtrend starts and those lines are now RESISTANCE. But if it stays on top of the MA lines and holds, they are support, the stock should eventually go back up as buyers buy at support and the rally continues.
20 and 50 MA price trend lines are for mostly short term trading. Long term traders like to use stocks with 100 and 200 MA lines, same theory just longer period of time.