Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: \TITLE Date: Fri, 13 Nov 92 13:07:19 EST Message-ID: <3.1992Nov13.130720@AmeriCast.com> 11/13/92 TITLE #m#gm#m##m#bug: Educating Investors#m# Staying In Sync By Using Moving Averages Lisa Lee Freeman The Dow Jones industrial average is meandering below its 200-day moving average, the Standard & Poor's 500 index is riding just above its 200-day line, while the Nasdaq composite index is soar- ing high above its 200-day average. The message, according to many technical analysts, is that smaller-cap E D U C A T I N G I N V E S T O R S growth stocks - most of which trade on the Nasdaq - are where it's at. "Although there will be corrections along the way, the (Nasdaq's) the area to be in," said Stan Weinstein, publisher of The Profes- sional Tape Reader, a Hollywood, Fla.-based newsletter. "Con- versely, with the Dow below its moving average, blue chips and other big-cap stocks may not be the place to be." How can he be so sure? The 200-day moving average (calculated by averaging the closing prices for the past 200 trading days) is a long-term trend indicator that smoothes out choppy day-to-day trading ac- tivity and clarifies market direction. It is most useful for longer-term investors. Many shorter-term moving averages are also tracked closely by analysts. Investor's Business Daily is the only newspaper that provides moving averages. To help readers assess the direction of the overall market, 200-day moving aver- age lines are plotted daily for the Dow industrials, the S&P 500 and the Investor's Business Daily 6000 indexes (shown today on page 15), for the Nasdaq composite (page 11), the American Stock Exchange's Market Value index (page 16) and the Investor's Busi- ness Daily Mutual Fund Index (page 19). For individual stocks, 200-day lines are provided for companies that appear in the "Industries in the News" feature (page 30), and 50-day moving average lines are plotted for each of the 90 "Stocks in the News" charts (pages 8, 12 and 17). The most basic rule of thumb in working with any moving average is that "if an index is moving decisively Staying In Sync By Using Moving Averages above or below its 200-day movingaverage line, it will more often than not act as a buy or sell signal," explained Ricky Harring- ton, market strategist at Marion Bass Securities Inc. in Char- lotte, N.C. But it's also important to note that the moving average is just one of many tools that technical analysts use for gauging market conditions. "You can't take one technical indica- tor and act on it in a vacuum," warned Marc Chaikin, senior vice president of Instinet Corp. in New York. "That's not prudent." Moving averages fall in the category of "mechanical" technical tools. The two other major areas of analysis are the psychologi- cal indicators (or market sentiment data) and fundamentals, which relate to such factors as the economy, interest rates and earn- ings. The first step in analyzing a moving average is determin- ing whether a market index - such as the Dow or S&P 500 -is above or below its moving average line. When an index moves above the line, it's positive. When it moves below it, it's negative. Some regard moving averages as "lagging" indicators that can be dangerously late in giving buy or sell signals. Watching for divergences between key market indexes and their moving averages can be helpful. When the major market indexes are above their 200-day moving averages and one suddenly drops below it, the oth- er market averages will often follow, said Chaikin. Investors should also keep an eye on the slope of the moving average line, said Weinstein. It's healthy, he said, "if the average is rising relatively sharply and (the index) is well above it. If the mov- ing average is essentially flat and the market (index) is above it, that's OK, but not as healthy as if the moving average is rising and the index is above it." Conversely, he said, "if an index is below a sharply declining moving average, that's a nega- tive situation." Take particular notice when an index violates its moving average after being above or below it for a long time. "That's usually a sign of change in the trend for the market," said Weinstein. "If an index is above its moving average for a long time and then breaks below it, that means the market is top- ping out. "Conversely, if it is below the moving average for a long time and finally edges above it, that means the market is ready to change direction and go up." Don Hays, director of in- vestment strategy at Wheat, First, Butcher & Singer Inc. in Rich- mond, Va., recalls how the S&P 500 - after riding above its 200- day lines for more than three years - knifed below it on the Thursday before Black Monday in October 1987 (see chart). After three solid years of advancing markets, that move was a clear warning sign, said Hays. He says it also was part of the catalyst that spurred the crash. Mere penetration of the 200-day line, however, is no guarantee of a change in market direction. On Sept. 14, the Nasdaq composite poked its head above its 200-day average as it extended a three- week rally. But it retreated the very next session and sold off the rest of the month. In early October, the Nasdaq started to rally again and - accompanied by very heavy volume - moved back above its 200-day line by mid-month. It's been up, up and away for the Over-The-Counter market ever since. Because there is no definitive way to read the violation of a moving average line, "an investor must always put technical patterns in the context of his fundamental view," advised Chaikin. "If you're bullish on the market fundamentally and underinvested -and you see a segment of market you're interested in move above its moving average on heavy volume - that technical condition, combined with (a posi- tive) fundamental view, should be a buy signal." But "if your view of the fundamental picture is negative," he added, "you might just watch the market more closely at that point to see if in fact the penetration of the average on the upside" is signifi- cant. If the index continues higher, it may be a good time to rethink your market view. If you're bearish and the market cuts below its moving average, it's a loud sell signal. If you're bullish, caution may be in order. If all this seems confusing, it is. "Tracking moving averages takes persistence and a lot of hard work," said Harrington. "It also requires some intuition and a bit of luck." Keep in mind that moving averages, like all indi- cators, are not infallible. There are times when an index will whipsaw back and forth through its moving average, as the S&P 500 has been doing for months. In this case, it's difficult to reach any conclusions, said Harrington. But when its direction is clear, a moving average can be very useful because, Harrington noted, "the cardinal rule in investing is to buy stocks in up- trends and sell them in downtrends." This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM