It was a useful gauge with Bitcoin and turns out for the U.S. stock market as well!
What exactly are we talking about? Well, it's something I've mentioned in the past...
The 200 Day Moving Average
See that blue squiggley line that bitcoin price got crazy far away from and crashed back down to this week?
That my friends is the 200 day moving average, which in the end is just represents the average price of bitcoin over the past 200 days.
Why and When I Use It
It's a longer term average that is widely used throughout the investing world, and to me is an example of slow orderly movement.
When price runs too far away from it - more often that not we see price converge back to it. Pretty basic and simple stuff here.
Thus when Bitcoin was 4, 5 times the distance from the 200 MA compared to the past year.....I got a little skittish and was definitely not adding to bitcoin, but rather trimming on up moves and buying back on down moves.
Now Let's Look at What Happened to the S&P 500
Anyone who has even seen a clip of news this week know the U.S. stock market got hit hard. I said a week ago (on the music and money radio show) that the S&P 500 had gotten ridiculous in January.
The index had been well above it's 200 MA for some time, but now it stretched much further away in a short time span.
A convergence was bound to happen, but when never know when that will occur. Could be a few day, weeks, or even months.
And so we have received it. Will the S&P get down to the 200MA, who knows. But it converged a majority of the spread on this violent down move - that is for sure.
Conclusion
As you can see this principle transcends markets. Cryptos, stock, commodities - the information applies.
When a market is extremely extended from it's 200 day MA, I am not looking to aggressively enter positions. Staying nimble at those times is prudent.
Could I miss out on some returns as the over extension continues? Sure - but I will also not be the one who gives most of it back when we see these draw downs.
Wanna Learn How to Read Crypto Charts and Invest Like The Cat?
These Videos Teach You The Three Simple Things I Use:
https://tradingeducationblogs.com/scg-crypto-investing/
Need to learn the basics about bitcoin, the blockchain and wallets?
Free e-book: ScaredyCatGuide to Knowing What the Heck Bitcoin Is
Best Regards,
Disclaimer: All info in this post is my opinion and for educational use.
Free e-book: ScaredyCatGuide to Knowing What the Heck Bitcoin Is
Best Regards,
Disclaimer: All info in this post is my opinion and for educational use.