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The Traders Wheel
2/22/99 by Alan Farley

Moving Average Rainbows – Part 2

Moving Average Rainbows uncover complex and startling trend-time relationships. When price undergoes a sudden shift in direction, the ribbons twist and mark clear signposts for the volatility that follows. Each of the averages requires a different time period to absorb price change. This emits a broad range of rainbow patterns that have obvious predictive power.

As the new trend evolves, MARs slowly invert themselves to accommodate the changing conditions. Time your positions to these visual inter-relationships. Execute swing trades when criss-cross MARs predict pivoting price movement. Once inversion completes, replace this strategy with a trend-following system that takes advantage of the new, convergent environment.

Use MARs to cross-verify signals ringing in other trading systems. It's no coincidence when complex math relationships point to an entry price where a major moving average stands. The rainbows ease the trader’s work through their visual simplicity and the "spectrum" analysis they provide.

Don't ignore popular averages, such as the 20, 50 and 200 day SMAs when creating MARs. They provide an easy framework for quick digestion of a large number of stock charts. Even if these old war-horses aren't part of your system yet, watch them to measure the crowd you're trading against. Focus on the common belief that short-term trends won’t violate the 20-day MA, while intermediate and long-term impulses find support at the 50 and 200 day MAs.

The practice of technical analysis often lacks simplicity. One unfortunate charting bias seeks ever more complicated sets of math in order to predict price. On the contrary, many traders now earn their living using little more than simple inputs of price and volume, packaged with moving averages. These kings of the trader’s toolbox provide an essential link between time, price and trend. And these natural building blocks tie together easily into powerful visual trading systems.

coms.gif (8277 bytes)
Twisting Moving Average ribbons reveal an odd rainbow crosspoint phenomenon. For some unknown reason, when major moving averages cross after a price shock, the crosspoint itself can become a major support/resistance level. As you’ll note from COMS bear plunge, the subsequent rally failed right at the crossing of the intermediate 50-day MA with the long-term 200 day MA.

 

Article contributed by The HARD Right Edge, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission, which presents highly original tutorials, strategies and resources on multi-trend technical analysis and and short term trading. Article reprinted here with permission.
 
 

 

 
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Last modified: April 02, 2001

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