MOVING AVERAGES

There are countless tools used in technical analysis.  One of the simplest and most helpful is the moving average.  In my charts, I tend to watch the simple moving average over 10, 20, 50, 100 and 200 periods.  I draw them as follows:

Note: the usage of “red-white-blue” makes it easier to quickly identify the more commonly involved lines on a crowded chart.  Also, I often show the USDJPY in purple on charts.  Not to be confused with the SMA50, it is rarely as smooth and curvy.

We can get a quick read on the big picture by looking at the daily moving averages.  If they’re all pointed in the same direction and are somewhat parallel to one another, that’s a strong trend.  On the other hand, if the 10-day is crossing the 20 (as above) or 50, then we’re setting up for a potential trend change.

I say “potential” because we also often see reversals at crossing points, particularly when central banks and their functionaries have a particular outcome in mind.  In fact, when a bearish 10/20 cross is about to occur, we often get a sudden rise in SPX, followed by the drop a few sessions later.

When this occurs, it’s because those in the know are positioning themselves ahead of time.  They do this by running stops and getting short (or at least hedging) while others are scrambling to cover.

A quick note on nomenclature:  if we’re talking about daily moving averages, the abbreviation is just SMA10, SMA20, etc.  If we’re talking about charts in different time periods, I insert that time period into the abbreviation.  For a 5-minute chart, for instance, we would see SMA5 10, SMA5 20, etc.