Trading with the big funds
Firstly what is the MA 200? The 200 day moving average is an indicator which institutional traders, as well as retail traders, use to establish whether the trend is UP or DOWN. The most common chart for viewing this is the daily chart (see below – Its the red line). If the trend is UP the market will trade above this feature and if the market trades below, the trend is down. For this reason, many trading text books recommend using the MA 200 as a good place for your stop. However, the institutional traders use this feature is a very different manner when the trend is UP.
It is well known that big funds will buy stocks when the market pulls back towards the MA 200 in a BULL market (trend up). They do this most commonly during November – April when the stock market traditionally puts in most of its gains for the year. After a long period where the market has been trading above the MA 200, a pullback offers a good opportunity to buy back into the market in case the market continues its trend upwards. But what happens if the trend is about to change I hear you say? Well, the funds actually aren’t too concerned with this. They are more fearful about missing the next big move up. The reason being is if they are not positioned when the market goes up they will lose their clients. If the market is going down all long only fund managers are losing money and for this reason, a client is likely to sit through the bad times. However, missing a 10% rise in the stock market is a very good reason to take your money elsewhere.
Human beings actually experience more anxiety if they miss something rather then if they lose something. (Tweet this)
So how does this knowledge play out in the stock market? Well, firstly the big funds are aware the MA 200 is a common place for the retail trader to place stops so they usually wait for all the stops to trigger which pushes the market down further and then buy at the nearest level of support for a better price. If you look at the above example, the MA 200 was lying at 5728 and a support level was present at 5710. The official low for the day was 5715 so the funds piled in just above 5710 after all the stops had been triggered at 5728 (MA 200). This then causes the market to quickly rise back above the moving average. Its unlikely buying would occur on a subsequent break below the MA 200 in the same month but going forward if we are in an UP trend and we are trading between Nov- April you will be fully prepared to take advantage of a low-risk short-term buy just under this feature and ride on the back of the funds.