Using Moving Averages To Determine Your Stock’s Short-Term And Long-Term Trends

Using Moving Averages To Determine Your Stock’s Short-Term And Long-Term Trends

Find out how to use moving averages to determine your stock¹s trends, how to spot winners bucking the market¹s recent downtrend and get three new stocks by simply applying your newfound knowledge!

It’s Monday evening and I’m working on the latest “Screen of the Week.”

In Asia, Japan’s Nikkei was down 3 percent on Monday, and another 4.4 percent in Tuesday’s morning trade. In Europe, Britain’s benchmark FTSE-100 was down 5.5 percent. France’s CAC-40 was down 6.8 percent and Germany’s blue chip DAX-30 fell 7.2 percent.

By the time you read this, the U.S. markets will have already opened for Tuesday. So at this very moment, you probably already know what the market is doing right now. (My guess is that the open wasn’t pretty.)

So what to do?

Well, first: Don’t panic. Big drops are usually followed by big gains—and big money is made after big falls have ended. Just think back to 2002. The end of that year, and all of 2003, was nothing short of absolutely spectacular. Then we had that correction in May, June and July of 2006, only to be followed by a huge run up more than twice the size of the correction! We had another sizeable, but short-lived, one-month correction in February 2007 that set the stage for another powerful rally.

So now we’re back in correction mode.

Nonetheless you can make money in individual stocks in both up, and down, markets, but it’s important in these times to look at some key measurements. One of these measures is the moving average. Short-term moving averages, for example, help gauge the short-term direction of the market while longer moving averages take a bigger picture view. For example: If a stock breaks the 200-day moving average on its way down, that’s generally thought to be bearish and indicative of a longer-term trend reversal. The 200- day moving average can also act as support. If a stock comes down but stops at the major moving average and then starts moving higher from there, it can act as a firm underpinning of support for the stock.

Looking at the 50-day moving average can be quite useful as well. It’s more of an intermediate snapshot of the price trend, and is more sensitive than the longer term 200 day. A rising moving average with the price trading above it is bullish, while a descending moving average with the price trading below it is bearish.

More shorter-term signals can be seen with the 10- and 20-day moving averages.

Moving average crossovers can also be valuable. When the quicker moving average (50 day for example) is above the slower moving average (200 day), this is thought to be bullish. Likewise, when the shorter term is trading below the longer term moving average, this is thought to be bearish.

Using a screener can be helpful in finding stocks that meet these criteria. Of course, moving averages alone don’t tell the whole story. But a company with solid fundamentals, trading above these momentum indicators, can help you find stocks bucking the downtrend and finding resilient winners.

The screen that I’m running today looks for stocks trading above their short-term (10- and 20-day), intermediate term (50 day) and long-term (200 day) moving averages. I’m also demanding that their current quarter earnings estimates have been raised within the last four weeks (or at least not lowered), their average broker rating has been upgraded (or at least not downgraded), and that they have a Zacks Rank of a 2 or 1 (Buy or Strong Buy).

Here are three great looking stocks that came thru this screen for 1/22/08:

HS HealthSpring, Inc.
LMNX Luminex Corp.
LCRD Lasercard Corp.

With the Research Wizard it’s easy to screen for winning stocks like these, even in tough markets. And once the stocks are displayed, you can scroll thru each stock chart with a click of the mouse, and see where the stocks are in relation to their different moving averages.

(Screenshot of Chart Window in the Research Wizard. Use the up and down arrows to scroll thru the list of the screened stock’s charts.)

Sign up now for your free trial today and start picking better stocks immediately. And with the back-testing feature, you can test your ideas to see how you can improve your trading in both up markets and down markets. Don’t wait for the market to get better before you decide to do better. Start learning how to be a better trader today! You can do it.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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