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Thursday, June 17, 2010

Fun With Moving Averages

Normally I use simple moving averages on individual stock charts, but on index charts I have been switching to the exponential averages, because in the last year or so it seems that the market movers (i,e., computers) have been using them to key off. However, sometimes I forget tti make the switch, and put up the simple averages, and occasionally disover that the market movers have switched over. Above is the 3 month SPX chart with all simple averages. Nothing special there; we have moved up over the 200dma and are well below resistance at the 50, giving us a pretty wide range to work with here.

Here is the same chart with all exponential averages. It sure gives us a different picture, doesn't it?  The 50 sure looks like it is putting up resistance here, and the 200dma is sitting right in the middle of a trading range. While the first chart shows a pretty good potential to move up from here, this one is sayng we are going to have a tough time moving any higher.

The Nasdaq is almost the direct opposite. The simple averages put us in a fairly narrow range betwwen the 50 and 200, with the middle point being tested today.

The exponential averages are a little trickier to try to decipher, but to me it looks like they put the Nasdaq in a wider range, with the 50 as a midpoint, which provided support today, barely.

The Russell 2000 looks a little like the SPX, with smple averages giving a wider range, and a somewhat more bullish chart. We have plenty of room here before we hit the 50, and today's successful test of the mid point could provide a launching pad for just such an assault.

The exponential averages almost make the chart look as bearish as the simple averages made it look bullish, We should have resistance at the 50, and that is exactly where we got rejected today. The 20 is at the midpoint of the range, and the 200 at the bottom. one of the keys to using moving averages is to figure out which ones are providing support and resistance. However, since nowadays the market movers seem to be silicon-based (today's 9 point SPX rise in the last half hour should confirm that), trying to anticipate which indexes and which averages they key off of is just about impossible, and even if you do figure it out, they can change at the drop of a hat, so it becomes a guessing game.

I will have the new highs update shortly.


BCNTrader said...

Really interesting.

I need more years of experience in the markets but I see that both systems differs when the trend is bullish or bearish. In an uptrend is nice to see how simple moving averages like CANSLIM method says works, but in a bearish uptrend, to watch for a reversal in a stock I tried EMA and it works better.

Maybe is just a season sign but it worked for the last year in so many stocks that reversed.

BCNTrader said...

Sorry, when I said bearish uptrend, obviously I wanted to say downtrend.

David said...

Hi BCNTrader.

William O'Neil uses weekly charts more than daily, and uses weekly moving averages (the 10 and 40) but never really explains why in his book, but I am starting to understand why. When you look at weekly charts, the moving averages seem to be stronger support and resistance than the daily charts. Also, the time frames are shorter, so the difference between exponential and simple averages is very small. It;s tough to use moving averages on a dail chart as signals, becuase I suspect the market movers know that traders are watching them, and often a break is a fake out move that reverses. I think the best thing to do is find one that works, and then when it stops working move on to something else. Thanks for the comment.

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