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 Qualcomm, Inc. (NASDAQ: QCOM).
I would like to use today’s Market Call to show you how stocks can go down.
The two charts below are our typical 60 minute and a daily using the same
indicators.
QCOM was last year’s largest gainer of all S&P 500 stocks.
QCOM opened the year at 200.
By using our simple moving average crossover system, profits can be made to
the short side and by staying out of a stock when dropping can keep you from
large losses that holders of QCOM have from the beginning of the year.
Learn to let your profits run until a new signal is generated.
How much lower can QCOM go?
