Tuesday, April 23, 2013

Technical Tuesdays: Moving Averages

One of the staples of technical analysis is the moving average. However, there is a considerable amount confusion and misinformation re how to use moving averages. Therefore, let's take a moment to dispel some of the static re moving averages and consider their real predictive value.

To begin, there is virtually no consistently predictive value in price touching and/or crossing its moving averages, be it 50 day or 200 day, be it simple or exponentially calculated. To illustrate, look at the two charts posted.

As the accompanying charts show quite clearly, for every time price touched its moving average and then bounced off of it there is another time when it went right through. And for every time it went right through its moving average it either subsequently reversed itself and crossed back over it again or continued its trend (up or down). In other words, price touching or crossing its moving averages in and of itself has little predictive value. However, price in conjunction with both moving averages AND both moving averages to each other AND the slope of each moving average DOES HAVE a high predictive value. This is the Mega Trend noted two weeks ago (see April 9 blog posting below).

Investment Strategy Implications

Every media talking head (yours truly, included) knows that whenever price touches or crosses either of its moving averages a call or email from someone in the financial media is certain to follow. My advice? Ignore moving averages except when used in conjunction with other factors. That's the real predictive value in them, not the wiggles and squiggles - they should just make you giggle.

About Technical Tuesdays

Technical Tuesdays illustrates selected elements of market intelligence analysis. It - along with fundamental and thematic analyses - is an integral part of an overall macro strategy analytical approach employed by Blue Marble Research Advisory.

To learn about Blue Marble Research Advisory services and its integrated and macro/holistic approach to investment strategy, click here!

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