Technical analysis has been around for decades and through the years traders have seen the invention of hundreds of indicators. While some indicators are more popular than others, few have proved to be as objective, reliable and useful as the moving average.
Moving averages come in various forms, but their underlying purpose remains the same: to help technical traders track the trends of financial assets by smoothing out the day-to-day price fluctuations, or noise. By identifying a changing trend, moving averages allow traders to make sure that the new trend works in their favor and it can often increase the number of winning trades.
The basic signal, known as a crossover, is a favorite among many traders because it removes all emotion. A buy sign is triggered when a short-term moving average crosses above a longer-term average. As you will see below, the most popular signal used to predict the beginning of a long-term uptrend occurs when a 50-day moving average crosses above a 200-day moving average. Let's take a look at a few companies that have recently experienced a bullish moving average crossover:
NATCO Group Inc. (NYSE:NTG) - Looking at the daily chart of NTG, you'll notice that the 50-day moving average (red line) recently moved above the 200-day moving average (pink line). This crossover suggests that the bulls are in control of the direction and that this could be the start of a new long-term uptrend. As you can see from the chart below, the bears have prevented the price from moving above the $54.25 level in the past, but today's close above it suggests that stock is poised to head higher. In addition, we've added the popular MACD indicator, which has recently triggered a buy signal by crossing above its trigger line (shown at the bottom of the chart). Active traders will likely use this crossover to confirm the break above the resistance.
American Medical Systems Holdings Inc. (Nasdaq:AMMD) - AMMD is another company that has recently had its 50-day moving average cross above its 200-day moving average. As you can see from the chart below, this stock has been trading within an ascending channel for the past six months, but the recent crossover between the two long-term moving averages suggests that the upward momentum may be poised to accelerate. Active traders will watch for a move toward the upper trendline because a close above it will signal a surge in buying interest. Many short-term traders will protect their positions by placing a stop-loss order below the nearby moving average, while less risk averse traders will set their stop losses below the lower trendline.
Adobe Systems Inc. (Nasdaq:ADBE) - Taking a look at ADBE, you'll notice that the 50-day moving average recently crossed above the 200-day moving average. As we've mentioned, this is generally a signal of a long-term shift upward. However, as you can see from the chart below, we've also noticed a short-term head-and-shoulders pattern has formed, which suggests that the bears are not willing to let the trend reverse its course without a fight. Today's close below the neckline (horizontal trendline) suggests that the bears may be trying to respond to the recent strength. Traders will keep a close eye on this stock because the price action over the next few days should give a clear indication of which technical signal will be most influential.