The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Combining Volume with Moving Average Crossovers
Moving averages are one of the oldest and most popular technical
analysis tools. A moving average is the average price of a security at a given time. When
calculating a moving average, you specify the time span to calculate the average price for
X number of periods. For example, 20 periods. These periods may be 5 minute bars, 15
minute bars or daily bars).
The classic interpretation of a moving average is to use it to
observe changes in prices. Investors typically buy when a security's price rises above its
moving average and sell when the price falls below its moving average.
The moving average crossover method calculates two moving
averages, each based on a different number of periods of trading data. When the
shorter-term (fewer days) average crosses above the longer-term average from below, this
is a buy signal for tomorrow's open. When the shorter-term average crosses below the
longer-term average from above, this is a sell signal for tomorrow's open.
The current charts we are using calculate a 5-day and a 20-day
exponential MA of the closing prices. If the 5-day MA crosses above (becomes greater than)
the 20-day MA, you would buy tomorrow on the opening because the system is saying that an
uptrend has begun. You maintain this long position as long as the 5-day MA is greater than
the 20-day MA. When the 5-day MA crosses below the 20-day MA, the trend is now down and
you would liquidate your long position and establish a new short position on the next
day's open.
Volume is another key indicator of change in direction. Many
times you will see peak volume at highs or lows. You will also see volume growing in the
direction of trend confirming the new trend change.
Let's look at EBAY Inc, EBAY
An excellent Sell signal that was confirmed by the crossing of
the 2 moving averages occurred at 10:00 AM on June 11. EBAY was 177 at the time of the
crossover.
Volume expanded on the 11th and also expanded today June 14,
1999. Was today a volume climax on the stock? Is EBAY now a buying opportunity?
If you are a trend follower using Moving Average crossover for
signals, you wait until the moving averages crossover again. Stay the course and let the
market tell you when to enter and when to exit. Stick with your discipline and exit
strategies.
