Moving averages are one aspect of technical analysis. They are generally known as momentum indicators. These averages will look at the trending movement of the stock prices over a period of time. This period of time can be as short as five days or as long as 200 days. The length of time an investor looks at is determined by what they want to accomplish with their analysis. If they are a day trader, they will look at the short term indicators, while longer term investors look at the long term figures. But do moving average crossover techniques work to determine buy and sell points?

Moving averages are lagging indicators since they are looking at where the stock price has gone. They are in essence, looking behind the stock vehicle. As such, they cannot be used to see what is coming ahead. However, they can be used to attempt to determine a trend of where the stock price may be going.

Some analysts claim that you can determine your buy and sell points based on different crossover points. There are several different crossover points that are used. One of these points is when the short-term moving average (5 – 35 days) crosses over the long-term moving average (50 – 200 days). If the momentum is an upward trend, then the stock is said to be in a bullish trend. If it is in a downward direction, then the stock is in a bearish trend.

The other type of crossover is when the stock price crosses over the moving average line. This trending line is a more accurate method of determining your trading strategy than the first method previously discussed. The same analysis holds true except you are reviewing the stock price movement in relation to the moving average rather than two moving average lines.

If the stock price is above the moving average line and it moves below it, it does not necessarily indicate a true bearish trend. It may just be having a slight correction. At this point, you should continue to watch the price of the stock. It may just bounce off of the support line which would be the long term moving average figure.

If the stock price moves below the 200 day average, then it may be an indication that you should sell. It may not be an indication that you should buy. The saying that you should not try and catch a falling knife holds true in this situation. Continue to watch the stock and only buy if an upward trend develops.

One of the problems with trying to analyze moving averages is the whipsaw effect. If you are analyzing a short term moving average or the market is choppy, then you run the risk of getting an incorrect signal. To really be effective, the moving average market analysis should be completed when the stock market is trending. The instability of the stock market in the March – May, 2010 period is an indicator of a period of time when the moving average analysis would not work.

Other trending analysis should be used in conjunction with the moving average analysis to truly get a positive signal of when to buy and to sell. When using technical analysis strategies, it is always a good idea to use several different analytic tools to check against each other.

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