Adrian Reid shows how the 200-day moving average separates bull markets from bear markets. When prices stay above it, volatility drops and trends hold. When they fall below, gaps widen and selling accelerates.
In this video, I'll explain to you why the 200 day moving average is one of the most powerful signals in technical analysis and why you should be using it in your trading systems to improve your results and reduce your drawdowns. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos. Because I've got new trading content coming out all the time and I don't want you to miss a thing. So what is the 200 day moving average? Well, as I explained in a previous video, you can watch that video here if you haven't seen it yet. The 200 day simple moving average is just the arithmetic average of the last 200 days of closing prices. So you take the closing price each day for the last 200 days, you add them up and then you divide it by 200 and that gives you the 200 day simple moving average. And on the chart here of the S&P 500, I've plotted the 200 day simple moving average in black. Now I'm just going to change this to red here because I want you to really be able to see it so that we can understand why it's just so powerful. And what I'm going to do is I'm going to zoom out. And what you can see when you look at the chart of The S&P 500 is all of the good things in the market happen when the price is above the 200 day moving average. And pretty much all of the bad things happen when the price is below the 200 day moving average. Above the 200 day moving average, the market volatility is low and it's trending up below the 200 day moving average. Like you see here. Let me zoom in.
The market is very volatile, gappy, and it's a bear market. And to be honest, it's pretty ugly to buy and hold stocks. So good things with low volatility happen above the 200 day moving average. And bad things, high volatility gaps and market crashes tend to happen below the 200 day moving average. And this idea has really stood the test of time. If we scroll back, you can see that the bull market from actually, let's start here. The bull market from post Covid recovery all the way to 2022 was all above the 200 day moving average. And then as we moved into 2022 and inflation really started to take off and interest rates started to rise to combat inflation, you see that the price fell and we went into a bear market. And all of that is below the 200 day moving average. If we come back here, you can see this is the COVID crash and we reached an all time high in the S&P 500 just before COVID And then Covid sort of started spreading around the world. And you can see there's a couple of big declines here. So yes, some declines can happen above the 200 day moving average, but there was a big consolidation around the 200 day moving average level. And then below the 200 day moving average, there were much higher volatility and a much greater decline in price. So holding on the long side below the 200 day moving average is typically pretty risky. Before COVID you can see the.
Bull market from 2019 to 2020 that was all above the 200 day moving average. Relatively low volatility.
At the end of 2018, early 2019, this little mini sort of bear market that we had here, again, all below the 200 day moving average. And if we go back even further, we can zoom right out, you can really start to see that the 200 day moving average really separates the bulls from the bears. You can see Post the 2000, before the 2000 tech bubble burst, the price was all above the 200 day moving average. A couple of big dips and corrections, but generally above. And then the tech bubble burst and we had several years of the price trending down. Almost all of that was below the 200 day moving average. And then from 2003 to 2007, when we had the global financial crisis, the price of the major indices more or less stayed above the 200 day moving average that whole time, a couple of little dips below. But the bulk of the bull market was above. And then for the entire bear Market in 2008, 2009, the price was below the 200 day moving average. So I hope you can see here that the 200 day moving average is one of those pivotal sort of separators or dividers in the market that separates the bulls from the bears. And if you're not paying attention to the 200 day moving average, particularly the 200 day simple moving average on the global stock indices, then you really should take a look at it because it does help you filter your trading strategies. At the very least, you want to be long above the 200 day moving average and in cash or short below the 200 day moving average. Buy and hold on the long side below the 200 day moving average is not likely to give you good results at all it's going to be volat loss making. But buy and hold above the 200 day moving average does work pretty well. But you know what else works really well above the 200 day moving average? Trend following on stocks. So if you want to improve your trading, then use the 200 day moving average indicator as a filter to help you divide the bulls from the bears and know what sort of market regime you're trading in. So if you want to know how to calculate these manually, as in you don't have a trading software or you want to use them in Excel, watch this video because I'm going to show you how to calculate each of the different types of moving averages manually so that you know how to do it in Excel, just in case you want to do some analysis outside of your charting package. So watch this video to figure out. To learn how to calculate the moving averages in Excel.
