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-period and a
20-period exponential MA of the closing prices on 60-minute bars. 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.
Let's look at America Online, AOL
AOL is an example of a stock that has had great trend following
characteristics over the past month. On June 8, AOL gave a Sell signal in the 113 area.
The stock then moved down to 89 and then gave a Buy signal in the 100 area on the way back
up. After climbing to 117, AOL broke a support at 113 and moved back down to 98.
Today, June 29, 1999, AOL crossed back using the Moving Average
method and flashed a Buy signal. Notice how the most recent down move from 117 to 98
retraced about 62% of the move from the June 14th low to the June 22 high. I would like to
see a little more volume in the stock and this should occur tomorrow if the trend is going
to continue.
I would Buy AOL on a break above 107. I would place a stop at 103
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