200DMA is calculated by taking arithmetic mean of all values in consideration (Stock prices, index levels) in last 200 trading sessions (40 weeks). 200DMA is generally used to assess long term trends. Another tool regularly used by traders to assess short term trends is 50DMA. Generally, a stock trading above its 200-day moving average is said to be in an uptrend and is being accumulated; one below it is in a downtrend and is being sold. (Learn how to calculate CAGR)
200DMA & 3 Year Returns
A comparison between 3 year CAGR and index’s distance from its 200DMA was made.
|Correlation | Investing based on 200DMA & 3 Year Returns (CAGR)|
- Regions marked A, B, C, D & E had Nifty trading at level 20% (+) above its 200DMA. And as green graph shows, returns obtained in all 5 regions have been negative. As of now, discussion on region F is being left out intentionally.
- In regions marked P, Q, R, S and T, Nifty has been trading at level 20% (-) below its 200DMA. And as green graph shows, returns obtained in all 5 regions have been positive.
- It is assumed here that investor is investing in index as a whole using an index fund or something similar. Similar graph drawn for individual stocks may show different results depending on sector’s business cycles.
- Region F (i.e. Year 2000-2004) is an outlier in this analysis as during this period, India was in long term secular bull market and as evident from graph, relation between 3Y-CAGR and distance of index from its 200DMA is not evident. Returns continue to be positive even though distance from 200DMA oscillates between positive and negative.