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.
Lets look at AT&T Corp. (NYSE: T).
This will serve as a good example as we have had a couple of signals over
the past few weeks.
Let's go back and look at the signal during the week of September 7 when T
broke below 47.
This signal stayed in place until the September 15 time frame. This signal,
however, did not perform as expected. T had very little follow through and
a quick exit would have been appropriate.
A new Sell signal occurred on September 21, was a signal that worked out
immediately and the stock continued lower.
We now see a new Buy signal in T. This occurred late on September 27, 1999.
A Buy here should have T continuing to move higher. If it does not move up
and looks like the signal of the September 15 signal, I would again exit
and reverse. It would mean the longer-term trend is still in effect to the
downside.
Since our time frame here is 60-minute bars, this signal becomes a Buy for
our short term trading.
I would Buy T on a flat to up open in the morning. If T has a gap open of
�, DO NOT take the trade.
Upon entry, I would place a stop and reverse at 42 �.
