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 Intel Corporation (NASDAQ:
INTC)
On September 5, INTC broke support and it did so in all of the indicators.
A technical trader would be short INTC at that time.
How low can INTC go?
I do not think anyone would have expected INTC to drop to under 56 from 75
in a little over 2 weeks.
Stops are critical to all trading.
Sometime in the near future, I expect INTC to give a Buy signal. Will this
signal workout?
The lesson here is discipline. Do not try to pick tops or bottoms and have
a trading plan that uses stops.
Watch INTC, when the moving averages cross back over, I would consider a
reversal trade. Until then, the trend is down and short is the side of the
market to be on in INTC.
There are many other large cap companies with similar patterns. Do not be a
hero here. Wait for a signal to buy.
