Technical Analysis Part 1 Moving Average

Posted by admin on February 21, 2009

As promised I am writing a small post on basic technical analysis.  The first thing I would like to say is that anyone out there can do anything you put your mind to in this world.  If anyone has been recently laid off I strongly urge you to have a positive mental attitude and put in some hard work either starting your own business or learning a new skill.  With a good attitude and hard work you will find or create a better life for yourself and your family.

Now technical analysis is an art not a science.  If you are interested feel free to go to Amazon and look over some of the books on Technical Analysis or go to your library and check out a couple of books and read them.  This stuff is a little dry, but it is easier than most people think if they just put some effort into it.

The main thing I want to start with is the moving average and I will try and keep this on the highest level.  The best form of technical analysis is the moving average.  It lets you know the direction of the trend depending upon whether the price is above or below the moving average.  There is a lot of debate regarding how long it should be etc.  For the stock market the normal industry moving average that most people look at is the 50 day simple moving average.  If the price is above the 50 day and even better if the 50 day moving average is rising then the trend is up.

The next thing some traders use is two moving averages, a 50 day for short term direction and the 200 day for long term direction.  They will buy when the 50 day MA (moving average) rises through the 200 day MA.  They will also use it as a sell signal when the 50 day MA moves below the 200 day MA.

Look at this chart with the 50 and 200 day moving average.

As you can see if you only used this simple technical analysis you could have gone to cash in January of 2008 and while not avoiding all of the losses you would have missed most of them and earned interest on your cash.  As you can also see there is a large gap between the 50 and 200 day MA right now.  That means that we are not likely to go to the upside any time soon.  We could probably break through the 50 day MA, but any rallies up to the 200 day MA should be considered sell points.

What you will normally see is a slow bottom and flattening of the 50 day MA and the 200 day come down toward the 50 day.  As I said prices will bounce up and hit the 200 day, but will probably turn around and come back down.  We will have to see where we are at that point.

Go to Yahoo Finance or Google Finance and pull up some charts and play around with these moving averages.  Change the times to see the effect.  Look at the S&P 500 since 1995 and see if you had bought when the 50 day went over the 200 day and gone to cash when is went under the 200 day how you would have done.

If you are wondering I have done the math and if you had invested $10,000 in the S&P 500 in Sep. 1994 and sold when the 50 day crossed below the 200 day and held cash.  Bought again when it crossed above the 200 day you would have approximately $37,000 now with 1% fee for commissions and assuming no dividends or additional investments.  Where as if you had invested the same $10,000 bought and held you would have approximately $16,000 right now.  That is a gain of 279% versus 61%.

Now is the time to decide.  Do you want to begin taking control of your investments and retirement or do you want to leave it in someone else’s hands to control for you.  This basic approach would take you no more than 5 minutes per day on the internet.  You can do this.

As always read the disclaimer I am not a licensed financial or tax advisor.  Any information listed on this site is not meant to be investment advice.  Investing is risky please do your own due diligence before investing.  Investing in stocks can lead to a loss in principal.