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 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-day and a 20-day exponential
MA of the closing prices. If the 5-day MA crosses above (becomes greater
than) the 20-day MA, you would buy tomorrow on the opening because the
system is saying that an uptrend has begun. You maintain this long position
as long as the 5-day MA is greater than the 20-day MA. When the 5-day MA
crosses below the 20-day MA, the trend is now down and you would liquidate
your long position and establish a new short position on the next day's
open.
Let’s look at Sun Microsystems (NASDAQ: SUNW).
Capitulation?
The markets had one of the most volatile days in the history of the
exchanges.
When there is a panic day like today, it can create buying opportunities.
Stocks that dropped and had sizeable range days, but closed on or near their
high, could signal a washout of weak hands.
Looking for these stocks and combining the action today with an indicator
like moving average crossovers can help signal entry into a trade.
SUNW has been in a downtrend as indicated by the moving average crossover
method.
Today, April 4, 2000, SUNW dropped to a low of 71 �, but closed near the
high at 90.
If and only if SUNW can break today’s high of 93 1/8, I would Buy the stock.
If SUNW does not break 93 1/8, do not enter SUNW.
If SUNW does move up in the morning to 93 1/8 and a trade is taken, I would
place my stop at 91.
