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 Level 3 Communications (NASDAQ: LVLT).
One of the easiest technical indicators a trader can use is moving averages.
Although they can seem a little slow at times, they will always keep you
the correct side of a major move and can even pinpoint some trend reversals.
From the chart below, you can see how well Moving Averages are working
with LVLT.
Our last exit and long was February 10 in the 119 area.
By being short or stepping aside, we would have been out of the drop to 100.
Now, LVLT has flashed a new Buy signal today.
Although LVLT sold off late in the day, this may give you another Buy
opportunity.
I would not chase the stock if you did not enter today. I would place a
limit Buy at 108.
I would place a stop at 103.
If I miss this trade, there will be others. I want my maximum risk at the
entry and at the time of my indicator signal.
