an tSionna 01.10.09 Moving Averages

We discussed calculating moving averages back in December. One of the things we screen on a daily basis are sets of moving averages and how they relate to each other. In particular we look for moving average crosses as these can be a harbinger of a change in market direction or trend. We screen moving averages on three different levels: Short, intermediate and longer term. Interestingly we are seeing as in this chart of the Nasdaq 100 ETF (QQQQ) many of these shorter term moving averages looking like they might be ready to go positive. You can see from the chart above that in point 3 this moving average cross (in technical parlance a "death cross") was one of the first signals of negative action. A positive cross here soon (also known as a "golden cross") could signal at least in the short term positive trading action for stocks.

The magnitude of our recent decline is such that I wouldn't be surprised if stocks are rejected at this juncture at least the first time they try to go forward. But it is another sign of a market in the early stages of trying to heal itself.

One final note. Moving average crosses don't by themselves signal the magnitude of a change in trend. That is they can't tell us if the change will last a day or a year. They by themselves are like canaries in coal mines. They alert us to changes we need to factor into our investment process and into the investment plan.

*Long in client accounts various ETF's related to QQQQ.