Friday, September 22, 2006
SPY Moving Averages 10 - 20 - 50
Using moving averages in order to gain some technical perspective about the daily movements is useful. A common strategy is to focus on the 10-day, 20-day, and the 50-day moving averages in context of the overall market's performance.
The key is to watch for crossovers. For example, a buy signal occurs when the shorter moving average (10-day) advances above the longer moving average (50-day). This just happened at the beginning of August. Likewise, a sell signal would be given when the shorter moving average (10-day) crosses below the longer moving average (50-day) which occurred last May.
Like everything else, these moving averages are not perfect timing tools. They won't be helpful if you expect to time the exact top or bottom. In addition, the shorter the moving averages you use, the more signals will be created as well as false tells. But, even with that in mind, I still use them. Over the years, I've seen fairly sophisticated trading systems based on these averages as well as long-term buy-and-hold systems that produce consistently good returns so I do recommend you learn more about them when you have time.