As traders we learn many tips, tricks, and phrases that tend to stick with us. "The trend is your friend" is one that comes to mind. "What goes up must come down" is another. Well this may be true in a physics class but is not necessarily true in the markets. What comes up may eventually come down, but how long until it comes down?
Often times traders use charts to make trading decisions and one of the most common tools used is the moving average. There are many variations on this but as time passes, the one that stands the test of time is the simple moving average. Over time traders have learned that stocks like to stay near their 20 period, simple moving average. This does not mean, however that a stock will fall to it's moving average.
Take the S&P 500 (NYSE: SPY) for example. It has rode along the 20 day simple moving average for the better part of 9 years now. From time to time it moves sharply away from the 2 day moving average but it does not come back to it every time. There are many instances where you can look back at a chart and see that the SPY price is over extended from the moving average. While a short trade may be tempting you can see times where the price just held at highs and waited for the moving average to catch up.
Boeing (NYSE: BA) is a great, real time example of this. Right now we can all agree that it is extended beyond it's 20 day average but will it come back to the moving average or sit at highs and wait? Understand the difference between a stock that is likely to pullback, and a stock that will likely sit at highs and you may have found some more profitable trades!