Simple    Moving    Average

"The market has a way of whittling all excessive pride & over blown egos down to size. The whole idea is to be completely objective & recognize what the marketplace is telling you, not try to prove that the thing you said or did yesterday or 6 weeks ago was right"

By William O'Neil (Founder of Investors Business Daily)

One of the simplest and easiest ways to track the performance of a stock is to plot the price of a stock along some very simple moving price averages(sma).  Most common ones that are utilized are:

• 10 days (faster moving average for swing trading growth stocks investors)
• 20 days (faster moving average for growth stock investors)
• 30 days (moving average utilized for faster moving 30 day sma cross over trading against the slower moving 50 day sma)
• 50 days (slower moving average utilized by institutions as a support area)
• 100 days (slower moving average utilized by institutions as a support/resistance area with volatile markets or stocks)
• 200 days (slower moving average over a longer time frame utilized by institutions for their larger holdings in their portfolio)

Simple moving average is the most widely known technical indicator.  It's easy to understand.  Closing price is averaged out over a specific number of trading days.  20 day sma is calculated by adding the closing price of each trading day over the last 20 trading days and averaged out by dividing it by 20 and plotting that line along the price bar of the stock.  It shows the price of the stock on any given day against the moving average line plotted on the stock chart.  It's a moving average because everyday, the new day price is added and the previous 21st day taken off the the list.  The line moves up or down daily with the new day of trading.  

Performance  of  My  4  Stocks

We had a  "Follow Thru"  day on Wednesday August 14th (13 days ago).  Market quickly changed its tune and now we have  7 distributions days between the  $NASDAQ  and  $SPY.  Market pulse has been changed to   "Market Under Pressure".  It's not the time to be taking any new positions under such conditions.  Understanding the concept of the simple moving averages will help you in holding your biases about the stocks.  If  your stocks are hovering around the faster moving 20 day sma while the the major indexes like  $DJI, $SPY and $QQQ  are below the 50 day, it tells you that institutions have a preferance for stocks that are further away from the 50 day sma and closer to the faster moving 20 day sma.  

In the last 13 trading sessions since the  "Follow Thru"  day, the performance of the 3 major indexes as well as the 4 stocks I suggested that we study are:

Indexes:

1. $QQQ   ... +1.17%
2. $DJI      ... +1.41%
3. $SPY    ... +1.52%

Stocks:

1. $SBUX   ... +0.68%
2. $PAYC   ... +4.91%
3. $MTH    ... +5.39%
4. $PCTY  ... +6.95%

Average           ... +4.57%

Data is very clear when you start looking at the simple moving averages.  It doesn't matter what your feelings are about the stock with it's fundamentals and technicals.  This data is what should ultimately drive your decisions about the stock.  Simple moving average line helps you to decide which stocks are preferred by the institutions.  They decide the movement of the price of the stock.  Currently all 4 stocks are along the 10 day sma while the general market as exhibited by the 3 indexes highlighted are struggling below the 50 day sma.  Average performance of these 4 stocks over the last 13 trading sessions is a whopping  3  times better than the performance of the general market using  $SPY  as a proxy for general market performance.  

Happy Trading!

Amin