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 Int'l Business Machines (NYSE: IBM).
On an hourly chart used in this column, IBM flashed Buy signals on the
moving average crossover method.
I do not think it is too late, and if IBM opens unchanged or up Monday, would
still consider a purchase on the stock.
However, the daily chart on IBM looks very negative with most indicators
pointing down. Since a trade here on IBM on a 60 minute chart allows a
great flexibility in managing risk than a daily, IBM may still have a nice
counter trend rally in a major down trend.
On an hourly basis, we also a small Head and Shoulders bottom forming with a
neckline around 94.
I would Buy IBM here on an up or unchanged open
I would place a stop at 91 7/8
Do NOT Buy IBM if it gaps down Monday morning.
