I’m lucky that I get a chance to read a lot and converse with really smart market participants all the time. So there are many lessons that I’ve gotten to learn the easy way, from my predecessors and colleagues. But there are some lessons that damn it you just need to learn on your own. For me one of those lessons was trading stocks near flat 200 day moving averages. And when I say “stock”, this can refer to an ETF, Commodity Futures, Index, etc. But when they’re near their directionless longer-term smoothing mechanism, you’re begging for trouble. If you like headaches, trade stocks near flat 200 day moving averages.
A more recent example can be seen in Gold Miners. This was a group that I loved early last year but our upside targets were hit in the summer. More recently it’s been a no touch for me. You can see a very clear downtrend through the end of last year, and now we’ve just had a counter trend rally. The problem was it rallied right to a flat 200 day simple moving average. I told everyone last week that it’s not for us, stay away. This week we are quickly reminded why:
You can see the rally that began late last year ended abruptly right at former resistance from November under $26 over the past couple of weeks. This area of overhead supply just happened to be right at a flat 200 day simple moving average. I’ve learned the hard way over many years to stay away from these situations. By definition, there is no trend. Our job is to find markets that are trending. The way I approach things, this is priced to perfection. Near these areas you get vicious swings without an identifiable direction. It’s a hot mess.
Over the last 2 days, Gold Miners $GDX fell 6.2% while the Junior Gold Miners $GDXJ fell 11.4%. Not only should this not come as a surprise, but in fact should be expected. Violent swings without any trend are commonplace.
So if you take anything away from me or this website it should be this: Stay away from stocks near flat 200 day simple moving averages. Trust me. Save yourself the headache. Also, some people have asked me how to quantify this and what exactly constitutes a flat 200 day moving average, or and how close price needs to be to qualify? Let’s just say that if you even need to think about it, it’s probably too close. Go find something else!
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