Earlier this month — June 8, to be exact — we officially entered a new bull market.
Now, I’ve been bullish since late last year…
But even if you missed my commentary, there was also a technical indicator telling you to get off the sidelines more than four months ago, when this rally was just kicking off.
It’s one of the most commonly used indicators out there, and it can help you spot big profit opportunities right as they’re getting started.
In fact, statistically speaking, most longer-term bullish trends are often preceded by this one specific signal.
There’s even a sister signal that tells us when the party is about to end… and a bearish trend is going to begin.
Today, I’m going to show you exactly what it is, how it works, and why it’s absolutely crucial to your trading.
Harnessing Moving Averages for Winning Trades
Today we’re going to talk about moving averages, one of the most commonly used indicators for trend analysis. They’re so popular that many charting sites display them by default.
Depending on the setting you choose, you can use moving averages for short-, medium- or long-term trends. There are two primary types — the simple moving average (SMA) and the exponential moving average (EMA).
A moving average is simply the price (usually the close) averaged over a number of price bars. This average is plotted on the chart and updated with each price bar, forming a line layered on top of the price chart.
For example, if you’re looking at a 10-day SMA, and the last 10 closing prices are…
11, 13, 12, 14, 16, 15, 17, 19, 17, 16
…you would add up all of those numbers and then divide by 10 to get the average. In this example, the average would be 15.
Then, let’s say the next day, the closing price is 17. You’d drop the oldest number in the set (11) and add in the newest (17)…
13, 12, 14, 16, 15, 17, 19, 17, 16, 17
…add them all up and divide by 10 to get the new average. This time, the average is 15.6.
If you continue to plot that value for each consecutive bar, you’ll form a line — the simple moving average line.
You’ll most frequently see these indicators used on daily charts. Some of the most popular moving average periods are the 50-day SMA, the 100-day SMA, and the 200-day SMA. And just like with other technical indicators, you can use these lines to identify overall trends, as well as support and resistance levels.
Here is an example of a 200-day SMA for a daily chart of SPY. Note in the chart below how the 200-day SMA served as strong resistance on two occasions.
The EMA is calculated in a similar way, but with more emphasis on the current bar; the idea is that this more closely reflects the current market value. You can see both types of moving averages plotted on the SPY chart below:
A common method of using moving averages is to plot a long-term and short-term on the chart at the same time. Below is the 200-day SMA (blue line) and the 50-day SMA (red line) plotted on the SPY chart:
When the short-term MA crosses below the long-term MA, it’s considered to be a bearish condition, and you can expect prices to move lower.
Conversely, when the short-term MA crosses above the long-term MA, it’s considered to be a bullish condition — like the cross we saw in early February, more than four months before the bull market’s official June 8 start date.
You can see for yourself in the chart above exactly what happened after each kind of cross occurred.
Here’s another example of a cross in Marathon Oil (MRO) that we saw in early 2022…
After the bullish cross, MRO increased 60% in price. Simple moving average lines help make trading easier — it doesn’t matter what’s happening in the news or across the world, they can clearly see how the stock is behaving right now.
As you can see, moving averages can be a great indicator…
…the problem is, with over 4,000 tradable companies out there, it’s impossible for an individual trader to look for these signals every day… across the entire stock universe…
It would be completely overwhelming.
That’s one reason why 70% of Wall Street is using AI to do the heavy lifting to help pick their trades.
Unfortunately, you can’t just call up one of these hedge funds and ask if you can use their million-dollar systems… well, you can, but you’d probably need six figures of capital just to get your foot in the door. Most hedge funds require initial investments of $100,000… some even require upward of $2 MILLION…
But that’s why I’ve been working on my own secret AI tool that ANYONE can use… and it takes all of the labor and guesswork out of trading. It tells me the best stocks to trade every single day…
And it blows even the best hedge fund waaaay out of the water — check it out.
To your continued success,
Tom Gentile
America’s #1 Pattern Trader
