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Say I calculate the 200-day EMA of a stock to be $25. The stock currently trades at $22. I see from the historical price action that it has touched $25 and failed to break it two times in the past 4 months.

Based on this information, is there a way to conclude if the $25 resistance is a strong or a weak resistance, i.e. what is the probability that the stock will respect the resistance this time around?

I understand I can use more technical analysis tools to confirm the resistance level, but just based on the EMA, is there any way to predict the strength of the resistance level? I heard that if the resistance has been tested more than x # of times, it means it is a strong resistance. But I also hear that the more times a resistance is tested, the weaker it becomes. Any thoughts?

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Firstly, you mean resistance not support, as a support is below the current price and resistance is above the price. Secondly using a MA as support or resistance would mean that that support or resistance level would move up or down as the price moved up or down and would not be static at $25.

Generally stocks will range trade more often than they will be trending (either up or down), so a stock can be range trading between a support and resistance levels for months and even years, and usually the longer it range trades for, the bigger the outbreak (either up or down) will be when it does happen.

Using a MA (especially shorter dated ones) as support or resistance (or as a up or down trend line) works better when a stock is already trending up or down. When a stock is moving sideways it will tend to keep crossing above and below the MA, and you will be whipsawed if you try to use them as your trigger for entry in these situations.

Compare the two charts below:

CBA in an uptrend with a 50d MA

In the first chart the stock is up-trending for over 6 months and the 50d EMA is being used as a support or up-trending line. As long as the price does not break through and close under the 50d EMA then the uptrend continues. You could use this EMA line as a means of entering the stock when prices move towards the EMA and bounce off it back up again. Or you could use it as your stop loss level, so if price closes below the EMA line you would sell your position.

NAB Range Trading

In the second chart, the stock has been range trading between the support line at about $21.80 and the resistance line at about $25.50 for 10 months. In this case the price has been moving above and below the 50d EMA during these 10 months and you may have been whipsawed many times if you were trading each break above or below the 50d EMA. A better strategy here would be to buy the stock as it approached the support line and bounces up off it and then close and reverse your position (go short) when the price approached the resistance line and bounces down off it.

Edit: When range trading you would have your stops just below the support line when going long and just above the resistance line when going short, that way if it does break through support or resistance and starts trending you will be covered.

So this shows that different strategies should be used when a stock is trending to when it is range trading. MAs are better used as entry signal during an established uptrend or downtrend than when a stock is range trading.

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    I am not sure that your 2nd paragraph is supported by facts...
    – assylias
    Commented May 30, 2013 at 1:00
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    @assylias - look at some stock charts or indexes over a long period of time and you will see this is true. The ASX200 has been range trading for the last 4 years, as one example. Trends are actually quite rare. Contrary to what most might think, prices really range 70-80 percent of the time. In other words, it is the norm for price to range.
    – Victor
    Commented May 30, 2013 at 2:08

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