To determine the long term market trend, The 200-day simple moving average formula (SMA) is a key indicator for the traders and market analysts. The price level in a market that coincides with the 200-day SMA is recognized as a major support level when price is above the 200-day SMA or resistance level when price is below the 200-day SMA level.
The 200-Day SMA
The 200-day simple moving average is mostly used for application to daily charts. The 200-day simple moving average, covers the previous 40 weeks' rates, is commonly used in stock trading to determine the general market trend. As long as a stock's price remains above the 200 SMA on the daily time frame, the stock is generally considered to be in an overall uptrend. One frequently used alternative to the 200-day SMA is a 255-day moving average that represents the trading for the previous year.
As a very long-term moving average, the 200-day SMA is often used in conjunction with other, shorter-term moving averages to show not only the market trend but also to assess the strength of the trend as indicated by the separation between moving average lines. When moving average lines converge, this indicates a lack of definitive market momentum, whereas increasing separation between shorter-term moving averages and longer-term moving averages, such as the 200-day SMA, indicates increasing trend strength and market momentum.
Death and Golden Crosses
The 200-day SMA is considered such a critically important trend indicator that the event of the 50-day SMA crossing to the downside of the 200-day SMA is referred to as a "death cross," signaling a serious bear market in a stock, index or other investment. In like fashion, the 50-day SMA crossing over to the upside of the 200-day SMA is called a "golden cross," referring to the fact that a stock is considered "golden," or nearly sure to rise in price once that happens.
It is possible there is also something of a self-fulfilling prophecy aspect to the 200-day SMA; markets react strongly in relation to it partially just because so many traders and analysts attach so much importance to it.