Simple    Moving    Average    Lines

"We've all heard the saying, 'timing is everything'. This is just as true in the stock market as it is in life. Knowing the optimal time to buy or sell a stock is a valuable skill anyone can and should learn" 

By Willian J O'Neil (Founder of Investors Business Daily)

Simple moving average (sma) lines are very simple tools to use for taking a position in a stock but also to exit a position for profit as well as exiting the position to mitigate loss.  Institutions account for more than 70% of the trading volume in the stock market.  Ultimately it is them that determine what the stock price is going to be.  If they  decide to enter a stock position, it may take them several weeks to accumulate the entire position.  Stocks will show that by having the price of the stock staying close to the faster moving 10 day and 21 day sma.  Conversely, if they decide to exit the position, it will show up as high volume of stock trading and the price will begin to get depressed lower.  It will show up as the  faster 10 day and the 20 day sma heading lower towards the  slower moving 50 day sma.


50 day moving average line is one of the most closely watched lines by the institutional investors.  Once the stock approaches this line after trading above the 20 day sma, retail investors ought to pay attention to see if the stock gets supported by the institutions at this level.  Institutional buyers will come in with huge volume buying to pick up these shares when they are committed to the stock.  One of the clues to look for during  'distribution days'  is to determine if your stock is being supported or disposed of by the institutions.  If your stock is supported and it bounces off the 50 day sma in volume considerably higher than the average daily trading volume, one might want to consider initiating a new position or adding on a second position in the stock.

How  Did  My  Stock  Perform?

We had a  "Folllow Thru"  day declared by IBD (Investors Business Daily) on November 5th.  $RH  stock was scaled up with a 7th additional position on November 6th @387.50.  Currently the stock is trading at $468 as of Friday December 5th. That's a return of  +20.77%  in just 4 weeks for this position.  Look over the charts and notice how the stock has been hovering above the 21 day sma.  Original position on $RH was initiated on April 8th at  $110.56.  Additional positions were added and scaled up as follows.  I have indicated in parenthesis the  %  profits for each of those positions as of Friday Dec 4th market close:

1. April 8  ... $110.56(323.30%)
2. June 8  ... $250.00(87.20%)
3. July 1   ... $250.29(86.98%)
4. Aug 26 ... $320.00(46.25%)
5. Oct 5    ... $375.00(24.80%)
6. Oct 15  ... $382.50(22.35%)
7. Nov 6   ... $387.50(20.77%)
8. Nov 13 ... $397.00(17.88%)

 

1st position at $110.56 initiated on Apr 8th after a  "Follow Thru"  day was the largest position, followed by smaller scaled up position at every step of the way.  When it comes time to harvest the profits, the last positions taken will have their stop limit orders triggered to mitigate losses.  It helps to understand the simple moving average lines of 10 day, 21 day and 50 day.  These are the lines that institutions follow and as retail traders and investors, we need to be in synch with the institutional investors.

   

It's a good idea always to plan for the worst and hope for the best.  Weekend is a good time to look over the stock charts and scrutinize all your positions.  Check the performance of your stocks to see if they are being supported by the institutions.  Get rid of the ones that are dropping off below the 21 day sma in higher volume than an average trading volume.  Compare the performance of your stocks against the  $SPY   and  the  $QQQ.  As a growth stock investor, you want your stock to outperform these 2 indexes.

I am hoping my analysis and the exercise with  $RH leading  stock helps you fine tune:

• Your selection of stocks to put on your watch list.
• Monitoring the performance of the indexes and the stocks utilizing simple moving average lines.
• Looking for clues of institutional support and resistance lines with the aid of simple moving average lines on the chart.
• Respecting losses in a stock of -7% to -8% and immediately cutting your losses.
• Monitoring the 50 day sma and the performance of the indexes and your stock in relation to this line.

I encourage comments and suggestions from my readers about the nuances of the moving averages that I may not have fully covered.  This post is to help guide you to maintain the profitability utilizing a very simple indicator of simple moving average lines plotted on your stock charts.

Happy Trading!

Amin