School Corner
Interpretation The recommended interpretation of moving averages is to buy when the market’s price rises above its moving average. A sell signal is generated when the price falls below its moving average. The problem with this interpretation is that it does not take into account the trend. As explained above, if the moving average is rising the trend is up. A far better way to use the moving average is to buy when the moving average is rising AND the price touches or drops below it. As long as the moving average rises, the trend is up so buying the pull back is a better proposition.
“A far better way to use the moving average is to buy when the moving average is rising AND the price touches or drops below it. ” In a downtrend, the moving average declines and a rally to the moving average gives a sell signal.
chart - Apple The 200-day moving average (red trendline) shows the long term trend. The general rule is that when the stock declines to its 200-day moving average the trendline should act as support. In the case of Apple the 200-day moving average failed to provide some support and the stock broke down. At first it appears that the long term trend has turned down, however this is not yet confirmed as the 200-day moving average is not declining.
74 | www.financial-spread-betting.com | January 2013
An attempt to rally back above the 200-day moving average at the end of November failed. The kiss of the red trendline gave a good sell signal. This clearly indicates that the trend is down. In the short term the 55-day moving average is declining, any rally to the 55-day MA would trigger another sell signal. Apple’s decline should therefore in my opinion, continue in the near term.