Moving Averages

Moving averages help measure the direction and strength of existing trends and can help determine when a trend change has taken place. A moving average line is simply an average of an issue's closing prices over a selected time span. The trend is considered up as long as the price of the issue is above the moving average line.

The most popular moving averages are the 10- and 50-day averages. A close below a moving average line is a warning of a potential trend change. A stock is considered to be strong by many technical analysts if it is above its 10- and 50-day moving averages. Think of moving average as a curving trend line. It is viewed by many to serve the same purpose as a trend line by providing support during sell offs in an up trend and resistance to bounces in a downtrend. And the breaking of a moving average line can carry the same meaning as the breaking of a trend line - a change in short-term trend.

Moving Averages, as helpful as they are, are lagging indicators. They confirm that trend - lagging indicators, do best in a trending environment. During an extended up trend, for example, moving averages often get you aboard and keep you aboard until the market exhausts itself.

A standard practice of telling whether an issue is trending or range bound is to look for cross-over arrows around the 10-day moving average. When the closing price crosses the 10-day MA line an arrow is displayed - green arrow for bullish crossovers and a red for bearish crossovers. If you see a series of arrows over a short time span, you can surmise the stock is likely range bound. The color of the Strength Meter icon tells you precisely whether a stock is trending up, down or if it has been range bound for the past three weeks. So remember that moving average indicators tend to be more accurate when applied to trending issues.

This play is one of the most simple. Stocks can range above their 10-day moving average for weeks at a time. The crossover points offer objective indications of market action so you can track the performance of these events.

Potential Entry Points

When the closing price of a stock crosses up through a moving average line it is often viewed as a bullish signal. We hedge with "often" because range bound stocks can whipsaw above and below moving average lines choosing a decernable trend. To help prevent you from getting into a moving average crossover play that whipsaws you out too soon, consider using a "2-days above" screening criteria that finds stocks that have been above their 10-day MA line for two days in a row. The trade-off is giving up the early part of the move for a more confirmed move.

Consider screening for stocks that have been above their 10-day moving average for two days and average six month trading volume of at least 100,000. To eliminate all but the up trending stocks, add, "Strength Meter - Green is equal to yes" to your screening criteria.

Potential Exit Points

For your possible short-term exit points, consider choosing between a trailing stop loss based on your profit goal in dollars or on a percentage move. For longer-term exit points, you may want to wait for the stock to cross down through its 10-day MA line. Which ever you pick, be sure to set Alerts to watch for these and other milestones.

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