Prices Migrate to the Moving Averages

Prices Migrate to the Moving Averages

“We cannot hold a torch to light another’s path without brightening our own.”

An observation made when doing candlestick analysis is that prices tend to stay near a major moving average. If prices move too far away too fast, they have a tendency to come back toward the moving average. It is advisable to start looking for candlestick signals near the moving averages, in conjunction with stochastics. It also becomes obvious to start watching for candlestick signals as the distance of the price becomes extended in moving away from a moving average. The stochastics are also confirming!

As can be seen in Fig. 3-5, the TRM Corp. chart, the signals are the impor­tant factor. The moving average is an important secondary target consider­ation. The Doji at the bottom in late August, followed by bullish candles, indi­cated where the potential resistance areas were going to be. The bullish candle, moving up through the 200-day moving average, all the way to the 50-day moving average, produces the first resistance level. Selling anywhere in that area produced a reasonably good profit. What will the trend do from there? As seen, just after mid-September, prices came back and just touched the 200-day moving average. The evaluation becomes easy at that point. Continued selling, bringing prices down through the 200-day moving average, would have been a good indication to start shorting the stock. This would have been the time to be observing what was going to happen at these important levels.

The “probabilities” indicate a downtrend was likely to start if the 200 MA was breached to the downside. Being alert, to watch for something major to hap­pen at the moving average, creates an advantage. A watchful candlestick ana­lyst can take advantage of a powerful signal as it is forming. Upon seeing the gap up from the moving averages and the potential of a kicker signal forming, and knowing that this is the scenario for dramatic moves, the candlestick inves­tor has a map for getting into this trade set up immediately. Would the big price move of the Kicker signal been anticipated? Definitely not! However, having the knowledge that moving averages have a significant influence on price trend is valuable. Seeing a Kicker signal forming produces the opportunity to be in a big move as it happens.

As noted, the indecisive signals over the next few days, the Doji, Hanging Man and Shooting Star formations indicated that the buying pressure had dis­appeared. The next major opportunity for a good price move occurred on an Inverted Hammer signal occurring right at the 50-day moving average at the end of November. This move would have been exploited by having the knowl­edge that a candlestick signal, occurring at the 50-day moving average, should have more substantial potential than when occurring without a major average involved. This is not rocket science. This is the accumulation of observations, having positive results an inordinate percentage of the time in the past. Major moves seem to coincide with candlestick signals at the major moving averages. Use this knowledge to your advantage.

“The aim of education should be to teach us rather how to think, than what to think - rather to improve our minds, so as to enable us to think for ourselves, than to load the memory with thoughts of other men.”                                                                                                                                                                     - Bill Beattie

Whether a trend gets to the next moving average or not, it at least pro­vides a target. It can be seen in Fig. 3-6 the Brightpoint Inc. chart, if price breaks through an important level, such as we see in late July, and starts pull­ing back, at least it can be anticipated the moving average might act as a sup­port level. The pullbacks of early August and early September clearly reveal the 50-day moving average acted as an important support level. The Bullish En­gulfing pattern in early September, followed by strong buying now makes the 200-day moving average the new potential target.

That target is demonstrating not to be a resistance level as the large bullish candle pushed right through it in mid-September. The crossing of the two aver­ages in mid-October once again acted as a significant reversal indicator. The quick drop in late October in between the two major averages immediately revealed candlestick “buy” signals starting the next leg up. Most investors do not know what to do with this chart pattern. Candlestick investors have the knowledge to take advantage of this pattern. The gap down in late October, the strong hammer signal followed by a small hammer signal, followed by a bullish engulfing pattern in the proximity of the moving averages are all strong candle­stick signals of an ensuing reversal.

When an investor can recognize that a price trend of a stock, or any trad­ing entity, is very closely related to the moving averages, implementing high- profit strategies become easy. It also decreases the elements of human emo­tions involved in the investment decisions. Note in Fig. 3-7, Borland Software Corp.’s chart, the moving averages act as a definite influence on the price trend.

Notice that the 50-day moving average acted as a resistance level on the prices first attempt, around the 1st of August. The second attempt in mid-August succeeded as the stochastics were in the oversold area, starting to come up. The success of the second attempt now makes the 200-day moving average the next target. The Evening Star signal was a clear indication that the sellers had stepped in during the mid-September attempt at the 200-day moving average. Once it failed, where was the next target? The 50-day moving average! Notice that the Piercing pattern, at the end of September, occurred by opening right on the 50-day moving average. The additional confirmation is stochastics be­ing in the oversold condition. This started the second attempt at the 200-day moving average. The bullish candle, that breached the 200-day moving aver­age, clearly indicated that level was not going to be a resistance area anymore. This now puts a completely new dynamic into the potential uptrend. The candle­stick analyst realizes there may be a new dynamic to the uptrend. That allows the investor to start making investment decisions based upon that knowledge.