Combining Volume with 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 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.
Volume is another key indicator of change in direction. Many times you will
see peak volume at highs or lows. You will also see volume growing in the
direction of trend confirming the new trend change.
Let's look at Global Crossing (NASDAQ: GBLX)
Although GBLX has been in a range between 32 and 37 over the past couple of
weeks, the use of moving averages along with peaks in volume can help to
identify turning points.
Notice how volume peaked yesterday in GBLX as price peaked. The buying
pressure reached a climatic point and with all the buyers in from 32
�, the stock reversed direction.
By midday today, November 10, 1999, GBLX gave a new Sell signal.
The ideal entry would have been the crossover point, but I would exit any
longs.
An aggressive trader may want to consider a Short here.
I would place my stop at 36 �.
