One of the common techniques most technicians employed is the moving averages. There are a variety of moving averages being use for monitoring potential support and resistance levels. They can be exponentially weighted or a simple weighted moving average and their period can be as short as 3 periods to 200 periods or longer.
Since there can be unlimited number of moving average generated using different combination of weighting factor and period, how can one determine which moving average(s) to use? Unfortunately, there is no simple answer to this question. However, some moving averages have been popularized and are widely used. These moving averages are 10 periods exponential moving average (EMA), 20 EMA, 50 periods simple moving average (SMA), 100 SMA and 200 SMA. There are minor variations to these moving averages such as 9 or 13 EMA instead of 10 EMA, 21 EMA instead of 20 EMA, and 30 SMA instead of 50 SMA.
Although there are some commonly used moving averages, they are not 100% reliable for detecting support and resistance levels. If these moving averages are improperly followed and used without context, one can easily get whipsaw.
Here are some steps to take to improve the reliability of using moving averages for detecting potential support and resistance levels. First and foremost is to identify the current trend of the stock, commodity or index. Is the current trend up, down or sideway? If the trend is up, then look for potential support off the moving averages, and if the trend is down, then look for resistance from the moving averages. For sideway price actions, simply use the moving average to monitor for change is the price trend.
From the chart for QQQ, notice the support off the rising 200 SMA at point A and the supports off the rising 20 EMA at point B & C. These supports are all from the context of rising moving averages. If the moving average is falling, then one will be looking for resistance levels from the moving averages. The price encountered resistance from the declining 20 EMA at point D. At point E on the chart, the price is consolidating near the 200 SMA and finding support from the rising trendline. Will the 200 SMA acts as support or will the price move below the 200 SMA and this moving average become future resistance? What do you think? Do not follow moving average blindly. Apply them with context.
