There are many tools and methods traders use to determine the trend on a particular stock or index. One objective method that was popularized by the founder of Stockcharts.com, John Murphy, is the crossover of two moving averages, namely the 13-day exponential and the 34-day exponential. The chart below depicts the crossovers of these two moving averages during the past year on the SPDR S&P 500 EDT
(NYSEARCA:SPY). When the faster 13-day exponential moving average crosses below the slower 34-day exponential moving average, the conclusion is that the current trend is now down. The flip side works in a similar fashion: When the 13-day exponential moving average crosses above the 34-day exponential moving average, one can consider the trend to be up. One warning: Moving average crossover-type systems can offer up some whipsaw-type action. As you can observe on the chart below, once a signal is triggered, a reversal is not uncommon. So yesterday morning, the 13-day exponential moving average has crossed beneath the 34-day exponential moving average for the first time since late June. But do not be surprised if we see a reflex rally.
This article by Tony Venosa was originally published on Schaeffer's Investment Research.
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