Moving Averages and Moving Average Crossovers
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 period) average crosses above the longer-term average
from below, this is a buy signal. When the shorter-term average crosses
below the longer-term average from above, this is a sell signal.
Moving averages are used to smooth prices, dampening the distractions of
short price movement so that the underlying trend is clearer. Moving
averages always lag the market and, therefore, will never buy market
bottoms or sell market tops. Like any other trend-following system, the
moving average crossover will perform best when markets are trending
because it automatically places the trader on the right side of every
extended move. When markets are moving sideways, however, the lack of
extended moves will cause losses.
When a stock is trending up and down, moving average crossovers look great.
During periods of consolidation, moving averages generate many trades but
do not produce superior profits. Let’s look at a good example of
moving average crossovers in a good example.
Moving averages can lead news events. Many times the moving average action
will precede a news event.
Let's look at Redback Networks Inc. (NASDAQ: RBAK)
.... as an
example of how movement signaled by the moving average could possible give
exit before the announcement.
Today, October 13, 1999, RBAK at the open and closed 9 points lower.
After the close, RBAK announced earnings that were below expectations.
Redback will open lower in the morning, but the technical indicator of
moving averages told us in advance that this would occur.
We see this so many times with news events. Technical analysis does not
tell what the earnings of any stock, but price action does.
If you look at a chart in INTC which was the earnings debacle yesterday,
you can see again the power of moving averages.
The examples of patterns and indicators used in this column should help you
with your trading in your stock.
Redback has nice trending moves. I would wait for the moving averages to
cross back to a Buy before entering this stock.
