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, 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 Oracle Corp. (NASDAQ: ORCL).
I like trading stocks with good trending characteristics.
We look for stocks whose trend lasts more than a day or two, yet has
reasonable volatility for placing stops.
ORCL has been one of these stocks, and by looking at the chart below I feel
you can find many others with similar characteristics to trade.
On December 15, on the gap opening, ORCL gave a Moving Average Buy signal
at 84 �. Without looking back, ORCL had a steady rise through the first
hour of trading on January 4. An exit there would have been at 109.
An aggressive trader may have also shorted ORCL then too.
In the last hour of trading Friday, ORCL has now flashed another Buy signal.
The expectation would be for ORCL to open up or unchanged and start a new
trend to the upside.
I would Buy ORCL on any up move on Monday morning.
I would place a stop at 97.
