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October 3, 2012 / redman59

The Forgotten but Effective Moving Average

In last night’s post I wrote about how AAPL was displaying some of the same characteristics as when the last time it saw a significant correction.  I mentioned that my first buying opportunity to establish some longer holding positions was if (& hopefully) it crossed below the 100 exponential moving average.  Every trader interested in technical analysis knows about the buying opportunity when a stock dips to the 50 or 200 simple moving average.  But one moving average not talked about often is the 100ema.

I have found that in stocks that have displayed superior momentum or have been leaders, the dip to the 100ema can be a great buy opportunity.  I refer to it as the “value” area of a stock in a technical analysis sense.  I have not done any studies or read to many articles on the why, but from a psychological standpoint it looks as if those that gave up when the 50sma has failed or saw above average selling (considered an exit sign) then the 100ema is considered an area in where to buy.  I like to think of it as flushing out some of those at the 50sma, but still carrying enough weight to get in as this is not often the case in momentum names if waiting for he 200sma.

So when when thinking about some former/current momentum stocks some that come to mind are:

  • NFLX
  • CMG
  • GOOG
  • V
  • AAPL
  • PNRA

The list could go on but these came to my mind for now and will provide charts on these.  I am looking at the exponential moving average and not the simple moving average.  Also the 100ema must be trending up for this to be a dip buying opportunity and other averages correctly stacked (50sma>100ema>200sma).  These stocks are not hard to find as they will have been heavily mentioned due to strength on the social stream, in the media, or highlighted by Investors Business Daily (such as the IBD50).  The buy would be if the low crosses below the 100ema and not necessarily a close below the 100ema.  Also the stop would be at your discretion based on your risk tolerance, I have not optimized and backtested this but it is just going off what I have noticed through the years.  Examples being 20% allocation with 10% stop (representing 2% on portfolio); or for more wiggle room a 10% allocation with 20% stop (same 2% portfolio risk).  Either way you get the idea.

Below are the charts of those stocks above with a yellow arrow  marking when the low crossed the 100ema.  The reader will have to judge if the 100ema was in an up-slope or not.  I didn’t cherry pick these but just listed some that came to mind and included the time period of some of their best moves.  GOOG didn’t look all that great but also found that when it did cross the 100ema the 100ema was rolling over, so would the trade be taken or not?  All hindsight in my opinion when you know the right side of the chart.  It’s all about risk tolerance here.  This is not a trading system but more of an awareness to how price responds to the 100ema.  The trader could add other filters as see fit.  I encourage you to go back look at any chart that was a momentum name and see how the 100ema.

Netflix

Chipotle Mexican Grill

Google

Visa

Apple

Panera

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