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 periods) average crosses above the longer-term average
from below, this is a buy signal for the next bar’s open. When the
shorter-term average crosses below the longer-term average from above, this
is a sell signal for the next bar’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 Ask Jeeves (NASDAQ: ASKJ).
One of the best ways to determine trend is with a moving average method. It
will keep you on the right side of any major moves in a stock. Moving
averages can frustrate a trader sometimes, as it seems like the signals are
occurring too slowly. It is true, when the trend changes, however it is
meant to give a trend some room for small minor trend changes. Stocks on
the move in either direction are the best for using moving average type
trading signals.
ASKJ gave a Buy signal in late December at 110. ASKJ rose to a high of 124
on January 3,2000, but did not confirm a Sell signal until the second hour
of trading on January 5, which would have a trader exiting and reversing at
115 7/8.
From January 5 ASKJ had a trendy decline until late Friday, January 14,
2000 at 102 15/16.
With this new Buy signal, a trend trader would enter again, knowing that
they did not get in at the bottom, nor will they get out at the top.
However, by taking the meat out of the middle and staying with the trend,
this method can produce some excellent results.
Stock selection is critical in any strategy. Look for trendy stocks.
I would Buy ASKJ at the opening.
I would place a stop at 96.
