VectorVest Views 6/17/05
Moving average (MA) crossovers are the oldest, simplest and most commonly used searches to identify a stock's price trend. An up signal is given when the short-term price MA crosses above the long-term price MA. A down signal is given when the short-term price MA crosses below the long-term price MA. Up signals generated by MA crossovers are ideally suited for bottom fishing purposes and may be used by all types of investors.
Conservative and Prudent Investors favor MA crossovers with longer look-back periods because these signals are more reliable. Aggressive Investors and Traders prefer MA crossovers with shorter look-back periods because they are faster. Other than indicating a stock's price history and its trend, MA crossovers say nothing about a stock. Therefore, no one should ever buy a stock just because it got an up signal from an MA crossover. Moreover, it is wise, if not necessary, to use MA crossover searches in conjunction with other information sources. This is where VectorVest comes in. VectorVest ProGraphics analyzes, sorts and ranks over 8,000 stocks every day by a variety of indicators and parameters, and VectorVest ProTrader, our technical analysis software, allows investors to customize and search for MA crossovers to their specifications. Together, VectorVest ProGraphics and VectorVest ProTrader provide everything an investor needs to go bottom fishing using MA crossovers.
This week's "Strategy of the Week" illustrates the use of a 10x30 Day MA Crossover search. Note that the search specifies finding stocks with Price >= $1.00, AvgVol >= 100,000 shares per day with Rec <> "S". It also specifies that both MAs are moving up when the crossover is made. (This requirement is OK for shorter term MAs but not suggested when one is using a look-back period greater than 50 days.) Finally, a somewhat exotic sort, VST*CI/ActualPrice, is used to find candidates which are likely to explode in price.
While MA crossovers are easy to use, one should recognize that they are date specific. In other words, the search cited above will find only those crossovers occurring on the date of the search. You should also be aware that a 10x30 Day MA crossover search will not give the same results as a 2x6 Week MA crossover search because the moving averages are actually different. For example, I ran the 10x30 Day search on August 20, 2004 and found 91 stocks. The 2x6 Week version of the same search found 375 stocks. The reason for this difference is that the former search uses 10 and 30 daily data points and the latter search uses 2 and 6 Friday data points. Incidentally, I got better testing results with the daily search.
Before leaving this subject, it's worth noting that MA crossovers play an important role in the VectorVest system. VectorVest Stop-Prices are driven from 13-week moving averages. If one thinks of Price as a one-day MA, we then say that any stock whose Price crosses above the Stop-Price gets a "H" or "B" rating. When Price crosses below Stop-Price, the stock gets an "S" rating. When we specified that the above cited search find stocks with Rec <> "S," we put the Price, Stop-Price MA crossover to work.
A ramification of this relationship was used in my essay on "Bottom Fishing Using Recommendation Sequences," written on May 20, 2005. In those searches we looked for stocks whose recommendation sequences went from "S" to "B" in a variety of sequences. In all cases, however, we were looking for stocks whose Prices had crossed from below to above Stop-Price. It was just another way to go Bottom Fishing Using MA Crossovers.