Moving Average's Role as a Psychological Barrier : Evidence from International Stock Markets

We show that the moving averages (MAs) of stock market indices act as psychological barriers and affect investors' trading. Market indices do not move continuously near their MAs, especially in markets dominated by unsophisticated investors. Utilizing international markets data, we show that the MA of a stock market index exerts significant impact on future index returns when it is crossed over, and the MA effect is distinct from both the 52-week high and historical high effects. The MA effect is especially evident when investor sophistication is low or anchoring propensity is strong, and could be used to formulate trading strategies