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, 60 minute 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-period MA
crosses above (becomes greater than) the 20-period MA, you would buy the
next bars opening because the system is saying that an uptrend has begun.
You maintain this long position as long as the 5-period MA is greater than
the 20-period MA. When the 5-period MA crosses below the 20-period MA, the
trend is now down and you would liquidate your long position and establish
a new short position on the next bars open.
Let’s look at Digital Island (NASDAQ: ISLD)
Over the past few days, this stock has been beaten up and has been moving down.
Late last week, ISLD moved into a channel formation that we see often and I
talk about in this column.
Today, January 3, 2000, ISLD gapped up and gave a channel breakout Buy
signal and a Moving Average Buy signal.
Look also at the volume in the stock. Volume confirmed the breakout and the
moving average reversal.
The ideal entry would have been early today in the 100 area.
If the stock retraces part of today’s move to 103, I would Buy ISLD at 103
on Tuesday, January 4, 2000.
I would place a stop at 97 �.
