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I am about to reveal that one of the most widely followed technical signals can be triggered.
But first, it is very important that you understand what this signal means.
When it comes to trading, knowing how your indicators are actually structured is everything!
Wavy lines are often built into your charts with complex calculations to help you understand whether a stock’s price is overbought, oversold or in a range, or whether the stock is converging or distributing.
Therefore, it is important to take the time to learn about their inner workings so that you can truly get the best out of these tools.
Lucky for you, today I’m going to focus on one of the simplest indicators out there, a simple moving average (SMA).
Simple moving averages are one of the most widely used indicators in existence.
As this first chart of SPY and its 20-day SMA show, these lines often help traders understand where key supply (resistance) and demand (support) points should form on a chart.
The reason I chose the 20-day SMA for this example is that it is a measure of trading over the past month (20ish trading days), which is the most important period followed by the world’s biggest traders and hedge funds. .
But what does this line really tell us?
Mathematically, a simple moving average tells us that the closest average price over the past X days is equal to the endpoint of that line.
So, if I use the 5-day SMA as an example, the math is:
5-Day SMA = (Day 1+Day 2+Day 3+Day 4+Day 5)/5
Easy, right?
But one thing most traders fail to remember is that since it is based on trailing entries, it is a Backward Indicator.
Keep that in mind as I show you this next chart at the heart of today’s discussion.
The S&P 500 may witness a “golden cross” when the 50-day SMA crosses above the 200-DMA.
Such crossovers have market-friendly implications.
The immediate crossover you see above is the result of all the momentum built up during the sluggish bottom line activity that has made life so difficult for many retail traders over the past several months.
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Have a great rest of the week and until next time!
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