Monday, June 15, 2009

10 Month EMA - Predicting Breakthrough or Breakdown?

A Simple Money Management Idea for Stock Traders at The Time and Money Report blog shares how the 10 month exponential moving average (EMA) has uncannily tracked the bear market decline and recent rebound. The author appropriately notes that "the problem with moving averages is that they always lag at the turn," meaning one would miss the top or bottom by waiting for the value to cross the moving average line.

The other complication is that the current values often "touch" the moving average line, do not cross it, and resume the existing trend. For now, such is the case, as the Dow, S&P 500 and Nasdaq indices are all approaching their 10 month EMAs from below. If they cross, and stay above the 10 month EMAs, we are probably in breakthrough for a longer term rally. If they only touch, and resume declining, we are probably in a breakdown towards a correction.

Interestingly, I've tested the 10 month EMA chart for several stocks I follow. The 10 month EMA may be a good tool for determining whether to sell, keep or buy a stock. If the stock price is advancing above the 10 month EMA, I will keep or consider buying the stock. If the stock price is consistently below the 10 month EMA, I will consider selling the stock if it falls a certain percentage, still to be determined.)

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

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