Moving Averages Explained: How Value Investors Use the 50 and 200-Day MA

If you have spent any time studying value investing, you know the drill: find companies trading below intrinsic value, wait for the market to recognize that value, and collect the upside. Benjamin Graham laid out the framework. Warren Buffett refined it. Millions of investors have followed some version of it for decades.

But one frustration that nearly every value investor runs into is buying too early. You find a fundamentally sound company at a discount, you buy, and then you watch it drift another 20 percent lower over the next few months before it ever turns around. Technically you were right. In practice, you sat on a paper loss longer than necessary — and maybe sold before the recovery.

That is where basic technical tools like the 50-day and 200-day moving averages come in. Used correctly, they do not replace your fundamental analysis. They help you time your entry with a bit more precision, so you are not guessing at the bottom.

What Is a Moving Average?

A moving average (MA) is simply the average closing price of a stock over a specified number of trading days, recalculated each day as new data arrives. The 50-day moving average tracks the average of the last 50 trading days. The 200-day moving average tracks the last 200 trading days.

Because these averages are recalculated daily, they create a smooth, rolling line on a price chart. When a stock is trending upward, the current price stays above its moving averages. When it is in a downtrend, the current price typically sits below them.

Neither average is magic. They simply reflect where the price has been and where the general momentum is pointing. The value comes from knowing how to interpret that information alongside your fundamental research.

The 50-Day MA: Medium-Term Momentum

The 50-day moving average is a medium-term indicator. It responds faster to recent price changes than the 200-day average, which makes it useful for spotting shifts in short-to-medium-term momentum.

When a stock's price climbs back above its 50-day MA after a correction, it is often a sign that buyers are returning. When it falls below, sellers are in control. For a value investor, the 50-day is less about predicting direction and more about understanding the current environment. Is the stock stabilizing after a selloff? Or is it still in freefall?

The 200-Day MA: The Long-Term Trend Line

The 200-day moving average is the more significant of the two for value investors. It approximates roughly 10 months of trading data, which is long enough to smooth out short-term noise and reflect the underlying trend.

Institutional investors — mutual funds, pension funds, insurance companies — pay close attention to the 200-day MA. Many of these funds have rules around it, which means the line often becomes a self-fulfilling area of support or resistance. When a stock sits below its 200-day MA, large institutions may be cautious about adding to positions. When it is above, confidence tends to be higher.

For a value investor, the 200-day MA offers one practical insight: a fundamentally undervalued stock trading below its 200-day MA may be in the early stages of bottoming out, but price has not yet confirmed a recovery. That matters for your entry.

Golden Cross and Death Cross

Two widely discussed patterns involve the relationship between the 50-day and 200-day moving averages:

Golden Cross: This occurs when the 50-day MA crosses above the 200-day MA. It is considered a bullish signal — an indication that shorter-term momentum has shifted upward relative to the longer-term trend. Traders often use it as a buy signal.

Death Cross: The inverse. The 50-day MA crosses below the 200-day MA, signaling that shorter-term selling pressure has overtaken the long-term trend. Often interpreted as bearish.

Here is the honest caveat: by the time a golden cross appears, a meaningful portion of the recovery has often already happened. The signal is lagging, not leading. It is more useful as a confirmation that a trend has changed than as a precise entry trigger.

For value investors, the golden cross can serve a different purpose: it helps confirm that a stock you already identified as fundamentally undervalued has started to attract buying interest. You are not chasing momentum — you are waiting for the market to agree with your thesis before committing fully.

How to Use Moving Averages as an Entry Tool

The most practical application for value investors looks something like this:

Step 1 — Identify the fundamental opportunity. Run your normal analysis. The stock's price-to-earnings ratio is below historical norms. The balance sheet is clean. Free cash flow is positive. You believe the market has oversold this company due to temporary headwinds.

Step 2 — Check price relative to the 200-day MA. If the stock is still significantly below its 200-day MA with no signs of stabilization, the downtrend may not be over. Consider waiting or taking a smaller initial position.

Step 3 — Watch for a stabilization signal. You are looking for one of several things: the price has stopped making new lows, the 50-day MA has flattened or started turning upward, or the price has reclaimed the 50-day MA on above-average volume.

Step 4 — Scale in as confirmation builds. Rather than buying all at once, use the moving averages to stage your entry. Buy a partial position when you have fundamental conviction, then add as technical confirmation improves.

This approach will not always give you the absolute bottom. But it can prevent the frustrating experience of buying into a still-falling stock and watching your paper loss compound for months before the eventual recovery.

One additional note on exponential vs. simple moving averages: most charting tools default to simple moving averages (SMA), which weight all days equally. Some traders prefer exponential moving averages (EMA), which give more weight to recent prices. For value investors using MAs purely as trend confirmation, the difference is minor — the 200-day SMA is the most widely watched by institutions, so it is the one that tends to act as a self-fulfilling support and resistance level in practice.

What Moving Averages Do Not Tell You

Moving averages are backward-looking. They cannot predict where a stock will go — they only reflect where it has been. A stock can bounce off its 200-day MA ten times and then break through it on the eleventh.

They also do not tell you anything about why a stock is moving. A company could be falling through its 200-day MA because it is deeply undervalued and temporarily out of favor, or because the business fundamentals are genuinely deteriorating. The chart cannot distinguish between these scenarios. Your fundamental analysis must.

This is why moving averages work as confirmation tools for value investors, not primary signals. The sequence should always be: fundamentals first, then technicals to help time the entry.

Putting It Together in Practice

Suppose you are researching a large-cap consumer staples company. After reviewing its 10-K, you determine the stock is trading at a significant discount to its five-year average valuation. Cash flow is healthy. The selloff appears to be driven by sector rotation, not a problem with the business.

You pull up a chart and notice the stock is trading about 8 percent below its 200-day MA, but the 50-day MA has begun to flatten. Volume has been declining on down days. You decide to take an initial position, with a plan to add more if the price reclaims the 50-day MA on strong volume.

Six weeks later, the 50-day crosses back above the 200-day (a golden cross). You add to your position. You are not guessing at the bottom — you are letting the price action confirm what your analysis already suggested.

That is the value investor's approach to moving averages: discipline first, timing second.

---

Take Your Research Further

If you want to screen for value stocks that are trading near or below their 200-day moving averages, the valueofstock.com screener lets you filter by both fundamental and technical criteria at the same time.

For a deeper dive into technical analysis, John Murphy's Technical Analysis of the Financial Markets is the standard reference on the subject. It covers moving averages and dozens of other tools in rigorous detail.

👉 Get it on Amazon

---

This article is for educational purposes only and does not constitute financial advice. All investments carry risk. Do your own research before making any investment decisions.