“There are many cases of 15% to 20% gaps between current share prices and the 200 day MA. Will the 200 day MA move up to the share price or will the share price move down to the 200 day MA?”

Eoin Treacy's view Thank you for this question which others may also have an interest in. The short answer is both. There is no reliable way of knowing just what shape a reversion will take. Let's look at three examples. McDonalds in the USA, Bunzl in the UK and L'Oreal in France. All three are dividend aristocrats in their respective regions.

McDonalds reached a high of $102 in January when the 200-day MA was in the region of $89; an overextension of approximately 12%. It has been ranging with a downward bias for over a month and the MA has caught up somewhat. That gap has narrowed to $4.40 or 4.5%. The medium-term uptrend will remain consistent provided it finds support above or in the region of $93.

Bunzl is currently testing the psychological 1000p level and is approximately 20% overextended relative to the 200-day MA; following an impressive acceleration since completing an 18-month range in December. Mean reversion is becoming an increasingly likely proposition. In 2009 Bunzl experienced a ranging consolidation which allowed the MA to catch up. In 2010 it experienced a swift pull back and ranged for a while in the region of the MA before rallying once more. While the MA is now moving rapidly higher, one cannot rule out the potential for a sharp decline.

L'Oreal has rallied impressively from the September lows and is now testing the July peak near €90. While a little overbought in the short-term, as it tests an area of prior resistance, nothing has occurred to question medium-term upside potential. If the trend is to remain consistent, any pullback should be limited to a minor consolidation.