Explaining moving averages, round numbers, historical price points, and open interest
Technical analysis is one of three key facets of Schaeffer's Expectational Analysis®, which examines a security's charts, fundamental backdrop, and investor sentiment to help traders get a holistic view on a stock.
Amid recent volatility, paying attention to the following four technical factors can give investors an edge on where a stock might find support or resistance: moving averages, round-number levels, important historical price points, and areas of heavy options open interest.
A moving average allows investors to filter out the "noise," or irregular fluctuations, to get a clearer idea of price trends. The 20- and 50-day trendlines are widely used and tend to be somewhat crowded indicators when analyzing short-term trends.
At Schaeffer's, we've grown partial to the somewhat uncommon 30-day moving average, particularly for analyzing volatile stocks for short-term directional moves. Using "offbeat" moving averages can give you an edge over the rest of the investing crowd, signaling when to "pull the trigger" on a trade.
Meanwhile, the longer-term 200-day moving average is one of the most commonly watched across the board. Speculators often utilize this trendline to send up "buy" or "sell" flares -- meaning it tends to act as support. But at Schaeffer's, another under-the-radar moving average we like to follow is the 160-day trendline, as well as its long-term counterpart, the 320-day trendline.
Stocks can also find support or resistance at historically significant or round-number prices.
A gap in a stock's chart, created when an equity suddenly spikes higher or drops lower, can also act as a level of support or resistance. It is not uncommon to see these kinds of sudden price changes after an earnings release, and some stocks struggle to fill their bull or bear gap.
Option-related support and resistance can also affect the behavior of an equity. Large amounts of put interest can signify potential resistance levels, while heavy levels of call open interest could represent potential short-term resistance levels.
In conclusion, technical analysis is a huge piece of the Expectational Analysis® puzzle. Moving averages are great to filter out the "noise" of a stock's short- or long-term trend, but don't be afraid to use "offbeat" trendlines like the 30-day and 160-day, which can provide an edge.
In addition, take heed to round numbers and historical price points -- like the site of a bull or bear gap -- and know an equity's short-term options backdrop, as open interest can also provide valuable clues.