Many investors are switching to ETFs or opting for robust long-term signals.

You can also use classical indicators for long-term signals provided you set the parameters correctly. In this edition, I discuss a popular strategy that uses technical analysis: the 200-day average. In the next entry, I will combine this approach with classical indicators for finer entry and exit.

The 200-Day Average

The 200-day average is a famous technical indicator for determining the long-term trend of a security. It calculates the average of the closing prices of the past 200 days.

Through this indicator, you know the general direction of your favorite value and you get the signal for a potential trend reversal.

Types of Averages

There are several types of averages and the most commonly used are:

• Arithmetic average (Simple moving average, SMA)
• Exponential moving average (EMA)
• Weighted average (Weighted moving average, WMA)

What is the main difference between these three?

The main difference is in the calculation of the weight of each stock market day during the chosen period. With the arithmetic average, each stock market day has equal weight. Thus, a past event has the same value as a recent event. Consequently, each stock market day counts for 0.5%.

With the exponential and the weighted average, recent data are given more weight by the use of a factor. In this post, I limit myself to the percentage weights for the last five trading days:

• EMA: 0.995% | 0.985% | 0.975% | 0.966% | 0.956%
• WMA: 0.995% | 0.990% | 0.985% | 0.980% | 0.975%

Trend Investor

As a long-term trend investor, you look at the trend and, more specifically, the direction of the mean. For this reason, the reaction speed between the averages mentioned above is not very decisive. On the other hand, if you take into account computer trading, assume that most computers work with an SMA. Therefore, the SMA is more important in this context.

The 52-Week Price-High

The 52-week price-high of a stock is the highest price at which the stock has traded in the past year. It provides a snapshot of a stock’s recent performance and indicates whether it has gained or lost momentum.
Reaching a 52-week high indicates a reflection of positive news, positive market sentiment and/or potential upward momentum.

Avoiding False Breakouts

Nevertheless, before entering, check whether the stock was trading sideways for a long period of time. This is because many stocks make a “false breakout” and shortly thereafter reverse below the previous resistance level. This movement is just the opposite of what you want: this is in fact a powerful sell signal!
Therefore, choose a trend upward price chart:

• The stock regularly makes a 52-week high
• The share does not end up in a long-term sideways channel.

How do you avoid positions in a long-term sideways channel?

The 52-Week 200 SMA-High

A new high in a stock’s 200-day average suggests that the stock’s continuing trend is reaching higher levels. This represents a sustained shift in the overall trend.

Combining Averages and Highs

This screenshot from TransStock software features a 10-year daily chart of Umicore, highlighting automatic green zones that identify periods when the average price moves upward, showcasing advanced trend analysis capabilities.

The chart above shows Umicore stock on Euronext Brussels.You see the bar chart showing a 200-day arithmetic average. The average turns blue when rising and red when falling. Above the graph you can see the New High barometer applied to the 200-day average. Thanks to that barometer, you will know when Umicore’s average makes new highs.

By combining this evolution of the average with the previously discussed 52-week high, you avoid an entry on a sideways moving stock.

 

Conclusion

As a long-term investor, you prefer equities:

• With New-SMA Highs
• Prices above the average
• New High Prices

These are strong trend up stocks. In the BEL20 index, 3 values are quoted with a 52NH (200sma). They are: ArgenX, Melexis, Solvay. D’Ieteren fell out at the end of July.