200 DMA is called the mother of all Moving Averages. Traders all over the world pay close attention to the 200 DMA and use it either as Buy Signal or Sell signal. It is also used by many traders as support or resistance zone. Since it is used largely and as a different indicator prices tend to respond to it quite nicely. However simply buying or selling on breach of 200 DMA is not a good idea. Traders need to use it in a conjunction with the other factors like the volumes, gap up or down, slope of 200 DMA etc. Before we dig further the another important factor that traders must bear in mind is the stock selection is extremely important while trading this strategy. It works best with highly liquid stocks and more importantly stocks which usually carry heavy index weight or which are part of largely followed index.
Enough of "Gyan" and now let's directly jump to few practical examples of recent times.
ICICI Bank : The stock gained its 200 DMA with huge volumes and a big gap. But no further momentum was seen later and it could not sustain above it. From the subsequent price actions it became very clear that the stock was not able to cross its 200 DMA and was facing tough resistance. Again it moved up to kiss 300 level where 200 DMA was placed but got rejected and this time around volumes had been quite higher.
Jet Airways : The stock gave a nice move after gaining its 200 DMA. But once it lost it, the same became a very tough resistance. The stock consolidated in a broader range of 640-590 for a quite long time and finally gave a break down.
ONGC : This is a very classical pattern. The stock was finding a very strong support around its 200 DMA but lost it with huge volumes and gave a sharp down move in just a couple of days. However these moves are difficult to trade but those who waited got other opportunity. Again the stock bounced back to its 200 and that was a great shorting opportunity.
HDFC : The counter was finding a good support around 1770 levels. It was stuck in a broader range of 1770-1875. It bounced nicely from its 200 DMA and once broke the resistance of 1875 gave a good move on the upside. The level of 1875 is still acting as a good support.
KSCL : The stock was facing very tough resistance around its 200 DMA. It managed to give a close above the same and witnessed retracement again below it. Again it gained and gave a good move. Volumes have been quite higher during recent past. The set up is good and the stock is in a bullish trend if you ask me :)
Yes Bank : The stock gave a strong break out above its 200 DMA with huge volumes recently but could not sustain at higher levels. However it has been finding great support around its 200 DMA. During last session we can see the formation of a strong bullish candle and it broke the consolidation range of 325-340. Though the set up looks bullish and have already initiated a long around 340, the price actions on Monday will be important to watch. This is a live trade and above 340 you can stay bullish with SL of 327.
Few more trades that worked well during the most recently are that of Balakrishna Industries & Apollo Tyre. You can check out the charts for your reference.
Conclusion : Well at first you might think that in the hindsight it looks good but practically it becomes difficult to analyse. But trading is an Art and not a perfect science. Besides stocks are in a shake out mood 80% of the time and only 20% moves are in the direction of a trend. So it becomes very difficult to quantify each and every thing. Mastering the strategy requires to follow it consistently over a period of time. Still if you have doubt or query or any question regarding this strategy please mention it in comment.
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