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.
Nextel Communications (NASDAQ:
NXTL)
Stocks do not usually go straight up, nor do they go straight down.
They tend to rally and then retrace parts of moves. When they are going
down, they have rallies that do not exceed previous high pivot points.
NXTL is an example of a stock with lower highs and lower lows.
On November 15, NXTL hit a high of 38 7/16. NXTL then gave a moving average
Short Sell signal on the 16th.
A Buy signal came on the 20th and that failed the next day too. The
short on the 21st did little.
Another Buy signal Friday, failed again today and NXTL flashed another Sell
signal near the close.
If NXTL opens down or unchanged, I would Short NXTL.
I would place a stop at 36.
NXTL should just continue the pattern of lower highs and lower lows.
If NXTL opens up, do NOT take the trade.
