How price relates to its average

Two simple observations come from an average. First, position: price above the average means the market trades higher than its own N-period mean — traditionally taken as a mark of upward bias; below it, the reverse. Second, slope: an upward-sloping average summarises a rising drift, a downward-sloping one a falling drift.

In trending markets one behaviour appears often: price pulls back, reacts near the average, and resumes the trend's direction. For this reason some chart readers watch the average as a kind of dynamic support or resistance zone. Remember the lesson of level 3 — this too is a zone rather than a line, and a reaction is a possibility, not an appointment.

The limit of both observations appears in sideways markets. Inside the band you met in level 2, price flips above and below the average constantly; the position signal loses meaning and the slope flattens. A moving average is a tool built on the assumption of a trend — where there is no trend, there is no direction to summarise.