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Sell With the Moving Averages

Moving averages are one of those trading tools that have gone to the wayside as we look for ever increasingly sophisticated methods of trading. As in most things, we tend to over complicate our trading and thereby "miss the forest for the trees." Or we miss the real direction of the stock by paying attention to the daily price fluctuations which may be nothing more than random fluctuations of the price.

What we need to do is pay attention to what the "Big Boys" are paying attention. After all, they are moving the stocks and we need to jump in front of them and be nimble enough to get out before they squash us. Forget true day trading. In and out in 5 to 10 minutes is not what I write about. Day Trading is  for people who want to spend all day in front of a screen. It requires ultra short time spans and nimble fingers are more important than moving averages. I'm not against day trading and several of my day trading colleagues make small fortunes. It's just that my style of trading allows me to trade and still have time for car pools and food shopping.

Three moving averages are important to the institution crowd and their individual importance is in relation to your time horizon. What they are:

  • 20 or 30 day MA for short term traders

  • 50 day for intermediate traders

  • 200 for long term traders

What is important to note is that most up trending stocks will pull back to to a moving average. This is telling you that a stock is declining. You need to determine if the decline is temporary or an indication that something more serious is occurring.

The big institutions will often jump in and buy a solid stock when it dips to its 50DMA. This support sends the stock higher. If the stock moves slightly below the average, it is probably OK to still hold it and wait and see whether it finds support over the next few days.

What happens if the funds don't start repurchasing? Without their buying power, the stock will head lower. That's why you should sell a stock that moves through its 50DMA on heavy volume. When it reaches the  200 DMA this is probably your last good chance to bail out.

Krispy Kreme is an example. It dropped through the 30 day average. And while it did not plummet as did many of the internet stocks, it went no where after the descent. So if you held on, you did not significantly lose more money, neither did you make any money over the next few months. Better to have booked the profit and move on to more profitable stocks.

 

Krispy Kreme made new a new high in December. It then broke the 30DMA on 1/14/02 with heavy volume. This was a sign that all was not well and indicated that a selling of the position was indicated. Those waiting to see if there would be a rebound got a second indication the next day when KKD dropped on even larger volume. This was the end of the ride in KKD. Although the stock rebounded off the 200DMA, as of this article it never revisited the highs made at this point.

 

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The Financial Ad Trader