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 Emulex Corp. (NASDAQ: EMLX).
One stock that I have been watching for a rebound is EMLX.
This stock has been crushed over the past few days.
EMLX looks now as it is flashing a Moving Average Buy signal.
The way I like to play a reversal is in momentum when it is going my way.
The stock closed today at 94. I would like to see the stock open up or
unchanged and move above 98.
I would Buy EMLX on a Buy stop at 98 1/8. If EMLX does not trade up to 98,
DO NOT take the trade.
Hopefully you can see by waiting for momentum to start before entering
trades, keeps us out of some bad trades. Use this technique with your
trading. I feel it is better than trying to pick bottoms.
If EMLX trades above 98, and I enter the trade, I would place my stop at 95.
