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MOVING AVERAGES


The Moving Average Trio

07/13/10 09:33:41 AM
by Ron Walker

By incorporating a trio of moving averages into a 15-minute price chart, traders can be alerted to strong signals when the market is gaining or losing momentum. Using this system allows a trader to capture the sweet spots when momentum is gaining or waning.

Security:   $SPX
Position:   N/A

We can amass valuable information using the triple crossover methodology. In this method you use the moving average trio (the 10-, 20-, and 50-period exponential moving averages, or EMA) to accurately pinpoint must-buy and must-sell signals. The market moves in four stages: accumulation, markup, distribution, and declining. By incorporating moving averages into a price chart, we can use moving averages to help us pinpoint which stage the market is in.

Stage 1 is marked by a sideways moving average, also called the accumulation phase. During this stage, the moving averages often stagnate and become tangled and intertwined, drifting sideways. Often, you will see the moving averages snap back into a bullish alignment toward the end of this phase when the 10-period crosses above the 20- period EMA, and both moving averages are above the 50-period EMA.


A bullish alignment occurs, in either a late stage 1 or an early stage 2 advance. The bullish alignment of the moving average trio ushers in the stage 2 advance, also referred to as the markup phase. This is the prime time to be long. When the moving averages become perfectly aligned, it triggers a must-buy signal. By that, we are looking for the moment that prices move above the high that occurred when the moving averages became perfectly aligned. When prices reaffirm the bullish alignment by moving above the high that was made, it confirms the must-buy signal and is the trigger to the trade. A confirmed bullish realignment is a strong signal that the market is gaining momentum.



FIGURE 1: $SPX, 15-MINUTE. A bearish alignment of the moving averages on June 22 provided a timely sell signal and ushered in a stage 4 decline. A stage 1 base developed in the form of an inverse head & shoulders pattern just as the moving averages snapped back into a bullish alignment.
Graphic provided by: StockCharts.com.
 
We can see these principles put into practice as the positioning of the moving averages validates prices as they move from stage to stage. A timely sell signal was given in Figure 1 on June 22 just after the market had peaked. The next buy signal came on July 6 and then was reaffirmed with a higher low on July 7, completing a stage 1 base and the right shoulder of an inverse head & shoulders pattern. Then a bullish alignment of the MAs occurred, marking the end of stage 1 and the beginning of stage 2.

Once the stage 2 advance comes to a conclusion, the pattern will move into stage 3, which is the distribution phase. This is very similar to stage 1 but differs in that people are no longer accumulating shares but rather distributing them.

Stage 3 is also characterized by that sideways move. In Figure 1, stage 3 began on June 16 and concluded with the penetration of the neckline of the head & shoulders topping pattern on June 22. Prior to that, a bearish realignment of the moving averages occurred during that same session.



Stage 4 is marked by the 10- and 20- period EMAs moving below the 50-period EMA, which marks the move to the declining phase. A bearish alignment occurs when the shortest MA is leading the intermediate MA and the intermediate MA is leading the long-term MA. In Figure 1 on June 22, you see this move from a phase 3 distribution to a phase 4 decline, capturing the perfect opportunity to be short on the market. The goal is to be short on the trade at the very beginning of the fourth-stage alignment. That is the secret to trading in the 15-minute time frame.


By using this methodology, you're not going to capture the bottoms when going long and you're never going to capture the tops when going short, but this system will allow you to capture most of the gains in a stage 2 advance or a stage 4 decline. The moving average trio can reveal the sweet spots by capturing momentum when it is gaining and waning.







Ron Walker

Ron Walker is an active trader and technical analyst. He operates an educational website dedicated to the study of Technical Analysis. The website offers free market analysis with daily video presentations and written commentaries. Ron is a video pioneer, being one of the first to utilize the internet producing Technical Analysis videos. His website is thechartpatterntrader.com

Website: thechartpatterntrader.com
E-mail address: thechartpatterntrader@gmail.com

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Comments

Date: 07/15/10Rank: 4Comment: 
Date: 07/20/10Rank: 5Comment: Nice to know, when you already using a strategy, and someone writes about it, exactly what you (me) are doing, means I m on the right path. Using the EMAs, also enable me to spot parabolic moves, which are very profitable, and trade irregular non-fib retracements
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