EMA Moving Average Exposed

Trading Technical Analysis Strategies

If You Had One Indicator For Trading Technical Analysis What Would It Be?
I participated in a trading webinar this past weekend where I demonstrated a few strategies to about 1,000 traders. The question I got asked the most over and over by at least 20 participants was to provide my favorite indicator for trading technical analysis strategies. My explanation was rather simple; the best indicator is the one that fits the type of market environment that you are currently trading.

Although my answer was accurate and correct, I could tell that my answer was too vague and didn't satisfy the curiosity of most traders. After the seminar ended I was asked one last time a slightly different question. The question was "if you had to choose only one technical analysis indicator, what would it be?

The Moving Average Indicator

My answer was quick and fast, it would be the 20 day exponential moving average. The exponential moving average is a variation of a simple moving average. Before computers were widely used for market analysis, traders relied on simple moving average indicators because they were easy and simple to calculate. To calculate a 10-day simple moving average, simply add the closing prices of the last 10 days and divide by 10. The 20-day moving average is calculated by adding the closing prices over a 20-day period and divide by 20, and so on.

As traders began using computers in the early seventies, they wanted to find ways to make improvement to the moving average, more specifically they wanted to find a way to create less lag between the market they were analyzing and the indicator. The simple moving average was just not fast enough to react to volatile market swings. Traders wanted an indicator that was similar to a simple moving average but would put more weight on recent price action and less on past price action.

You can see in this example how the simple moving average reacts much slower to price action than the exponential moving average. This is the primary reason why most short term traders and day traders use the exponential moving average instead of the simple one.

The Best Way To Utilize The Exponential Moving Average

During the next few days I will show you a complete trading method that I created several years ago that relies on the exponential moving average indicator. Since the exponential moving average is very dynamic and responds well to recent price changes, I tend to use it to trade pullback or retracement strategies.

The first thing you need to do is to adjust the exponential moving average to 20 days. The 20 day is a good starting point for most volatile stocks, futures and currency markets. If you are day trading, use 20 bars instead of 20 days.

After you adjust the settings you want to find a stock or other market that's trading substantially above the 20 day exponential moving average. The further the price is away from the average the better. You can see in this example how far the stock is trading above the moving average. This is a great filter for finding stocks or other markets that are trending strongly.

The Stock Rallied and Within A Few Days Drops Completely Below The EMA

The next step after the stock or other market you are trading drops completely below the 20 day EMA is to wait for the market to trade once again completely above the 20 Day EMA. You can see how the stock only dropped for a few days prior to resuming the strong trend, this is a good sign. If the stock was to stay below the average for more than one week I would probably be a bit concerned about continued momentum.

Market Action

U.S. markets rallied for the second-straight session to four-week peaks while clearing key technical hurdles in the process. Solid earnings results were more in focus as geopolitical and trade concerns eased. White House economic advisor, Larry Kudlow, said that the Chinese are offering a constructive reaction to the trade dispute which helped lift market spirits.

The Nasdaq showed the most strength after surging 1.7% while testing a high of 7,298 to easily clear its 50-day moving average. The Russell 2000 closed in positive territory for the sixth-time in seven sessions after rallying 1.1% while making a push just south of 1,583.

The S&P 500 was up 1.1% after trading to an intraday high of 2,713 and holding the 2,700 level into the close. The Dow jumped 0.9% after reaching a peak of 24,858 while closing in on the 25,000 level and prior mid-March support. Both indexes cleared their 50-day moving averages while regaining positive territory for the year.

Technology and Consumer Discretionary zoomed 1.9%. Real Estate soared 1.4% while Materials and Utilities were higher by 1.1%, respectively. There were no sector weakness.

Global Economy

European markets rebounded from Monday's losses to close higher across the board. Germany's DAX 30 jumped 1.6% while the Belgium20, France's CAC 40, and the Stoxx 600 Europe rallied 0.8%. UK's FTSE 100 gained 0.4%.

The German April ZEW survey expectations of economic growth fell 13.3 to a 5-year low of minus 8.2, weaker than expectations for a drop of 6.1.

Asian markets settled on both sides of the ledger following mixed economic news. China's Shanghai sank 1.4%, Hong Kong's Hang Seng fell 0.8%, and South Korea's Kospi slipped 0.2%. Japan's Nikkei was higher by 0.1% and
Australia's S&P/ASX 200 was up a less than a point.

China Q1 GDP rose 6.8% year-over-year, matching expectations.

China March industrial production rose 6% year-over-year, weaker than forecast for a rise of 6.3% and the slowest pace of increase in 7 months.

China March retail sales rose 10.1% year-over-year, topping expectations for a print of 9.7%.

U.S. Economy

Industrial Production rose 0.5% in March, with capacity at 78%, which was better than expectations for a rise of 0.4%.

Housing starts rebounded 1.9% to a 1,319,000 rate in March, while building permits rose 2.5% to a 1,354,000 rate. Additionally, the IMF issued its latest projections for global growth of 3.9% in 2018 and 2019, unchanged from its prior forecasts in January.

Redbook Store Sales were up 3% for the year in the week ending April 14th.

Market Sentiment

Chicago Fed Charles Evans sees the Fed raising rates gradually without risk or evidence of an inflation surge, while there's no need to hike rates much above a neutral setting. He expects rates to continue to rise gradually over the next couple of years and says the economic is firing on all cylinders, with the job market solid and consumer fundamentals quite strong.

Evans sees forward momentum on capital spending and fiscal policy strongly expansionary. He said while global growth is picking up at the same time, there is some uncertainty from trade. He views inflation somewhat below target but expects it to improve, while there's little risk of accelerating markedly higher inflation. Overall, Evans seemed quite optimistic on the economic outlook, though still relatively calm about inflation prospects.

San Francisco Fed John Williams sees inflation closing in on the 2% target rate, while the economy continues its expansion. He reiterated the FOMC should continue along its gradualist rate hike path, which would reduce the risks of an overheating economy. Williams added growth should average about 2.5% this year and next, while the unemployment rate could fall to 3.5% next year.

Philadelphia Fed Patrick Harker said the labor market is fairly tight and the U.S. student debt burden could dissuade potential students while hurting the economy. Harker did not stray into the current economy or policy.

The iShares 20+ Year Treasury Bond ETF (TLT) closed higher for a third-straight session after making a run to $121.58. Upper resistance at $121-$121.50 held with a close above this level being a continued bullish signal. Support remains at $120.50-$120 with backup help at $119.50-$119 and the 50-day moving average.

Volatility Index

The S&P 500 Volatility Index ($VIX) traded lower for a sixth-straight session after tapping an intraday low of 14.57. Support is 15-14.50 held with a close below the latter getting 13.50-13 and the 200-day moving average in play. Lowered resistance is now at 16-16.50 with a move back above 17.50 being a cautious development.

RSI is pushing major support at 40 and levels not seen since May 2017. Continued closes below this level keeps 35-30 in play. Resistance is at 45-50 with a move above the latter signaling additional strength and a possible short-term market peak.

Market Analysis

The Spider S&P 500 ETF (SPY) was up for the third time in four sessions after trading to a high of $270.87 and making a solid breakout above its 50-day moving average. Fresh resistance at $270-$270.50 held with additional hurdles at $272-$272.50. Rising support is at $268-$267.50.

RSI is back in a solid uptrend with resistance at 60 from early March. Continued closes above this level would be a very bullish signal for a possible run towards 70. Support is at 50 with a close below this level signaling a possible short-term top.

Sector

The Technology Select Sector Spiders (XLK) reached a peak of $68.29 while closing above its 50-day moving average for the second-straight session. Longer-term resistance from January and March is at $68.50-$69 with continued closes above the latter being a very bullish signal. Rising support is at $67.50-$67.

RSI is back in an uptrend with near-term resistance at 60-65 and March highs. A move above the latter would signal additional strength and a possible push towards 70-75. Support is at 50.

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