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 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-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.
Let’s look at VA Linux Systems.
On December 9, 1999, LNUX went public and hit a trading high that day of
320.
Since December 9, 1999, there have been many short term and many long term
(daily bars) buy and sell signals on this stock using moving average
crossover systems.
It would not matter if you used our day trading, 60 minute time frame or a
daily time frame. The strict discipline of following each signal with the
combination of stop orders on new trading signals would have provided a
trader with excellent trades and signals.
As we see the NASDAQ at this years low and prospects of it possibly falling
further, the moving average crossover method performs well, keeping a trader
on the correct side.
As stocks like INTC, DELL, WCOM, LU, and many, many more stocks continue to
drop, I am often asked “how low can they go?”
Well, take a look at LNUX. Who thought that LNUX would drop from 320 to 250,
or 200, or 100? How many at 100 said, “It can’t go any lower?” How many
at 50 or 25 said the same thing?
Here we sit at 14 3/8, and I am here to tell you, it can go lower.
It may be interesting to try to pick a top in a stock, but by using moving
averages on a stock in a down trend, there are great opportunities for
profits.
On November 3, LNUX once again gave a moving average sell signal or short
signal with the stock at 30.
How low is low? I don’t know. If your stock is in a moving average sell
signal, please be sure to use stops.
Let your profits run and stay short LNUX.
