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.
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
On June 15, I wrote "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."
Today June 16, 1999, EBAY gapped up at the opening and by 3:00 PM
gave a moving average crossover Buy signal. The MACD indicator confirmed this signal and
Momentum and OBV is moving up.
Now is the time to cover Short positions and enter a long
position in the stock. I would place a stop on a new long position at 144
Today's rally was impressive and many stocks gave new Buy
signals. This looks like it could be a real rally in stocks.
