|The moving average (MA) is a frequently used indicator in technical analysis. It shows the average stock's price over a given period and can be used to identify the direction of a price trend. In an uptrend, a short-term exponential moving average (EMA) will stay above a long-term EMA, and the opposite occurs in a downtrend.|
|For swing trading, the "swing zone" between the 20-day EMA and the 50-day EMA can be very important as it provides pullback entry opportunity in a trending stock. If the stock is in an uptrend and enters the swing zone, we can expect a possible buying opportunity. Consider entering a long position when the stock closes above its 20-period EMA. Similarly for a downtrending stock, which enters the swing zone, we can look to short the stock when it closes below its 20-period EMA.|
|FIGURE 1: PFE, DAILY. The 20-period EMA (green line) has stayed below the 50-period EMA (red line) for an extended period.|
|Graphic provided by: Wealth-Lab.|
|As shown in Figure 1, the 20-period EMA (green line) has stayed below the 50-period EMA (red line) for an extended period. This demonstrates that the stock is in a downtrend. For the last three days, PFE has stayed in a swing zone, so there is an opportunity to short. On July 11, the stock closed below its 20-period EMA. Now we can potentially short the stock below its last bar's low (that is, $17.68) with an initial stop-loss above the stock's recent high of $18.57.|
Click here for more information about our publications!