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Moving Averages

I mentioned yesterday that I will be talking about some indicators I use and tonight I would like to start the series with one of the most important ones the moving averages. 

Moving averages are derived from the closing price of a stock over time.  They are used to show a linear trend on a chart.  There are EMAs (Exponential Moving Averages) or SMAs (Simple Moving Averages).  Moving averages are lagging indicators.  That is they tell a picture of what occurred.  The data points that make up a moving average come from the close price on stocks.  So they always represent data that is already known to us.  The EMA places more weight on the most recent pricing trend so it tends to have less lag than the SMA. 

Trends in Moving Averages
The general upward or downward direction of a moving average is called the trend.  
For short term movement I typically use the 9 day and 33 EMA.  If it is longer term then I use a 50 day and 200 SMA.  The reason being the length of time you are focusing on when looking for a trend.  If you are looking for a stock that is getting ready to move up you want to focus on the short term.  I use long term trend lines if I am looking at shorting a stock or for a longer term hold.  What you are basically looking for in either the long term or the short term is the direction of the trend.  Up is good; down is bad (unless you are planning on shorting). 

Support and Resistance in Moving Averages
The moving average can also be a decent signal for support or resistance.  You have often heard me talk about buying a stock for a quick bounce play.  How did I know it was likely to bounce Well amongst other indicators the stock had dropped to its short term moving average.  That is the most likely spot for a stock to bounce.  It usually represents a fairly decent level of support. 

New Trends in Moving Averages
Lastly you can use the moving averages to identify new trends in stocks.  You might have heard me or one of the moderators mention in the past about a cross in the moving averages.  Anytime you have a short term moving average crossing over the mid term average or the mid term crossing over the long term you have the potential for a new trend forming.  A positive cross would equate to a pending positive move in the stock.  While a negative cross would equate to a pending negative move.





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