Friday, March 14, 2014

Moving Average Crossovers and Shopping for Market Bargains

So imagine you are following all common stocks trading across the major U.S. exchanges and you track how many each day are crossing above their 20-day moving averages and how many are crossing below their 20-day averages.  If you take the net number of crossovers each day and track on a rolling five-day basis, you'd get a chart that looks like the above.

You'll notice that thrusts in crossovers to the upside have tended to lead price peaks in the market.  Troughs in the number of crossovers have corresponded with a number of short-term bottoms.

After yesterday's rout, you can see we're in the range of many of those troughs.  Indeed, since 2012, when (as yesterday) the net five-day number of crossovers has fallen below -1000, the next five days in SPY have averaged a gain of over 1.4%--about four times the average five-day price change over that period.

There are plenty of current geopolitical factors that could erupt and turn the recent decline into a deeper dive, so one cannot blindly assume that the future will mirror the past.  It's when tape action begins to confirm historical tendencies that you have a potential good short-term trade and NRK goes shopping.

Further Reading:  How Trading Systems Can Inform Discretionary Trading