Everyone wants to be able to understand stock trends. Even if you are doing fundamental analysis, technical analysis of stock movements can be used to pick the right time to get in/out of the stocks you’ve evaluated. Simple Moving Averages (SMAs) are a foundational way that technical analysis gurus can evaluate recent stock movements, to determine those trends.
In Part 1 of this series, we looked at the nuts and bolts of how to configure SMAs in Stock TickerPicker. In this article, we’ll look in more detail at how to use SMAs to understand the trends.
When configuring SMAs on a price chart, you typically want to configure SMAs with different time frames. You will typically want to look at a short-term moving average, perhaps 10-period/day. You’ll also want an intermediate moving average, perhaps a 50-period/day average. Finally, you’ll want to include a long-term moving average, most commonly a 200-period/day moving average. This will let you see the long-term trends as well as short-term momentum.
Momentum is short-term stock price movement diverging away from the long-term trend. So if you have the three moving averages configured as described above, you will discover short-term bullish momentum if the short-term SMA is diverging upwards above the long-term SMA.
Check out this IMAX 3-month chart. You can see here that the 10-day SMA has broken out above the 50-day SMA which is above the 200-day SMA. This is a bullish momentum signal.
This 3-month GOOG chart shows the opposite. The stock is trending bearish, as indicated by the 10-day and 50-day SMAs moving below the 200-day SMA. This might be a short-sell candidate.
Often a 200-day SMA can highlight the support for the stock – the level at which buyers enter, finding the price to be at a long-term low. A moving average can also act as a ceiling on stock movements – it represents the price at which selling occurs, finding the price to be a near-term high.
One strategy is to look for cross-overs – the point at which the stock price crosses above or below a moving average. You can also look for when a short-term moving average (say, 10-day SMA) crosses above/below a long-term moving average (say, 50-day SMA). A cross-over indicates a change in momentum, and can often foreshadow a significant price movement. A buy signal is generated when the short-term average crosses above the long-term average, while a sell signal is triggered by a short-term average crossing below a long-term average.
Hopefully this helps you understand how moving averages can be used. Now go off and practice using them on stock charts in Stock TickerPicker!