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, 15, 30, 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 30 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 Inktomi Corporation
(NASDAQ: INKT).
Here is a stock that has been beaten down. Over the past 5 trading days,
INKT has been in a congestion pattern.
A breakout of support could generate a nice channel breakout and the
confirmation of the moving averages helps a trader have a specific trading
plan for entry and exit.
INKT at 11:00 AM EST flashed its Buy signal at 24 15/16.
Each bar just continued higher and the stock moved up sharply taking out the
high of the previous 5 days.
Ride your winners and cut your losers short.
I expect INKT to continue higher.
Just use the moving average plan for exit in this one.
