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To: terri acey who wrote (10715)	2/27/1999 1:55:00 PM
From: terri acey	Read Replies (4) \| Respond to of 40688

Some info for all those technical analysis buffs: MOVING AVERAGES - The Blanket, 26-Feb-1999 Whether you have a fancy charting service or use one of the many free services on the Internet, you will find that many stock charts have one to two linear lines depicted on the face of the chart. These lines are called MOVING AVERAGES; one of the simplest technical analysis tools available. Analyzing the markets or individual stocks doesn't have to be complicated and for many investors some of the simplest indicators can often be the most useful in finding stocks that warrant further investigation. MOVING AVERAGES are one of these indicators that, when used in combination with others, can be a very powerful tool when analyzing a potential investment. ***************************** What is the significance of the MOVING AVERAGE indicator? All a moving average does is smooth out the jiggles in a chart so it is easier to view a TREND LINE. The longer the period used in calculating the average, the smoother the line will be. A quick look at a chart reveals how the stock is doing relative to its trend line or moving average. On occasion you will read or hear about a security trading above, at, or below its 30, 50, or 200 day moving average (DMA). Depending on your investment horizon one moving average may be more suitable for your analysis than others, and as we get further into this discussion I will touch on the use of more then one MA as an effective tool in analyzing a chart and making buy and sell decisions. CALCULATION To begin, it is important that one understands why it is called a "moving" average and how it is calculated. Let's assume we want to view a 5-DMA. In the table below I have calculated the 5-DMA for Friday through Tuesday (2): Day Closing Price Calculation 5-DMA Monday 10 Tuesday 11 Wednesday 13 Thursday 12 Friday 13 (10+11+13+12+13)/5 = 11.8 Monday (2) 15 (11+13+12+13+15)/5 = 12.8 Tuesday (2) 16 (13+12+13+15+16)/5 = 13.8 As you can see, the figures for the last five days are used in the calculation and as we "move" to the next day the closing price of the oldest day drops from the calculation and the most recent price is used. Note that in this example, even though the closing price goes up and down over the five days the moving average increases. This is the beginning of a trend line, which will ultimately be used to evaluate whether the current price of the stock is following or going against the trend. LAGGING INDICATOR Unlike an indicator that signals potential for a future change in a stock price, a MOVING AVERAGE confirms that a change in a trend has already taken place. I draw this to your attention so that you understand that when viewing a chart with various MAs the longer the time period used in (i.e. 200-DMA vs. 50-DMA) the more "lag" there will be in the price movement. To view this concept click on the following link to obtain a chart on Amazon (AMZN): bigcharts.com Note - this is a different charting service than I have used in previous articles but I'm going to give you hands on experience at changing the indicators yourself. On the left-hand side you will see several items you can click on. Please do the following: 1) Click on time frame and select Time = 3 months, Frequency will remain daily. 2) Click on indicators and select Moving Averages = SMA (Simple Moving Average) and change the number 9 to 5 (number of days.) 3) Click on DRAW CHART. Pinpoint the high price in early January and note how the moving average peaks and begins its descent 3 days after the original downward price movement. What you are viewing is the "lag" and thus the reason for MOVING AVERAGES being a confirmation of a trend vs. a signal for future change. VARIATIONS Thus far I have been using and directing you to a "simple" moving average (SMA). Many charting services use a "weighted" (WMA) or "exponential" moving average (EMA) that places heavier emphasis on more recent prices. Using the same AMZN chart just viewed, change your moving average selection from SMA (Simple moving average) to EMA (Exponential Moving Average). Click on draw chart and note that the moving average peaks 1 day earlier and begins its descent 2 days after the downward price turn vs. the 3 days displayed on the chart using the SMA. Because the EMA reveals an earlier indication of a price change, I will make use of it as opposed to SMA as we move into using the MOVING AVERAGE in evaluating potential investments. EVALUATING A POTENTIAL INVESTMENT Let us begin by drawing another chart: Best Buy Co. 1. Type BBY in the symbol field 2. Make sure that the Time frame is 3 months and "daily." 3. Set the Moving Averages to EMA and "days" to 50 (type 50 in the box to the right of the Moving Averages field.) The most important aspect of this chart is the slope of the line. A 50-DMA that is upward sloping indicates that the trend of the stock is up and that the stock is strong. In evaluating Best Buy Co. you can see that it is trading well above its 50-DMA. This doesn't mean that you should run out and buy BBY now, but rather, that it is very strong stock and could be a potentially good investment. Now let us take a look at a stock that is trading well below it's 50-DMA by drawing a chart for USX-Marathon Group: Symbol = MRO Time frame= 3 months, daily Moving Averages = EMA, days = 50 Again, the most important aspect of this chart is the slope of the line. A 50-DMA that is downward sloping indicates that the trend of the stock is down and that the stock is weak. Also note that this stock is trading well below its 50-DMA. Whereas BBY was a very strong stock, USX-Marathon Group is very weak and should not be considered further as a potential investment. The exception to this statement is that it could be considered a good candidate for shorting (selling a stock in anticipation of buying it back cheaper) which could be a newsletter in and of itself! In both of the previous charts I have used the 50-DMA. Using the 50-DMA as opposed to a shorter time frame, like the 20-DMA, tends to smooth out a lot of the jiggles in the shorter term moving average. But how does one know what time period is best to use? NUMBER OF DAYS TO USE IN MOVING AVERAGES As a rule of thumb the longer your investment horizon the longer the time frame that should be used for the moving average. The 200-DMA is best known for monitoring major trends and it might be a suitable indicator for a long-term investor. A short-term investor might choose a 30- or 50-DMA, which are more commonly used to measure intermediate trends. A day trader, on the other hand, might use a 5, 10 or 20-DMA. Returning back to Best Buy Co., select: Symbol = BBY Time = 3 months, daily Moving Averages = EMA, days = 20 Again, BBY is trading above the moving average. Now compare how it traded against the 20-DMA during January as opposed to February. In January it traded well above it's 20-DMA, which was a sign of SUPER STRENGTH. In February it begins to hover at its 20-DMA, which is an indication that the momentum is weakening. Now change the number of days back to 50 and view the difference. Though the trend of the moving average has not changed (they both slope upward) this weakening I've just pointed out from January to February isn't clearly indicated by looking at the 50-DMA alone. So, you are probably asking yourself, "Why wouldn't I always want to use a shorter time frame?" The answer lies in your investment horizon. Remember there are those investors who may have substantial capital gains accumulated and they would prefer not to realize these gains for tax purposes unless they are convinced there has been a major change in the trend. USE OF MULTIPLE MOVING AVERAGES AS BUY/SELL SIGNALS Often times you will see a chart that has more than one moving average. This can be very useful in confirming that a buy or sell signal has occurred. To illustrate, let us take a look at how Chase Manhattan Corp. has traded over the past year by bringing up the following chart: Symbol = CMB Time = 1 year, daily Moving Averages = EMA (2 line), days = 20 (This will give us the 20 and 40 day moving averages) Note how the 40-day (blue line) "slower" moving average is much smoother then the shorter 20-day (green line) "faster" moving average is. Also note that on several occasions the lines cross over each other. The "crossing over" of these lines can be used to confirm a buy or sell signal. The first significant "crossing over" occurs in early August 1998. At this juncture the faster 20-DMA crosses and goes below the slower 40-DMA. This confirms a sell signal. Note how CMB traded for the following two and a half months below both moving averages. This was definitely not a time to go "bottom picking" in hopes of buying at a good price. On the flip side, focus on the change in slope that occurs in mid-October 1998 where both the 20 and 40-DMA turn a corner and begin to rise. Shortly thereafter a second "crossing over" occurs in late October when the faster 20-DMA rises above the slower 40-DMA. This confirms a buy signal. Also, note that CMB begins to trade above both moving averages, which is bullish and indicates strength in the stock. At this time I could go into more depth about crossovers and how Moving Averages can serve as support or resistance levels, but I'll save that for a future discussion. So to wrap things up; analyzing stocks doesn't have to be complicated and often the best indicators are the simplest ones. A MOVING AVERAGE is a lagging indicator that can be very accurate and reliable in confirming a change in or continuation of a price trend and which, ultimately, can support a buy or sell decision when analyzing your portfolio.