Moving averages

In my last article on moving averages, I discussed how moving averages can be used to make stock selection decisions. In that article, I noted that the moving averages mostly used by stock traders are the 50-day and 200-day moving averages and I promised to discuss how to combine moving averages for better trading signals. Often times, the 50-day and 200-day moving averages are combined to produce useful indicators that can generate profitable trades. Usually, there is a general consensus among technical analysis experts that when the short-term moving average (50-day SMA) moves above a longer-term moving average (200-day SMA), a buy signal is created. This movement above the long-term moving average by the shorter term one, is called golden cross. On the other hand, when the short-term moving average (50-day SMA) moves below the longer-term moving average (200-day SMA), a sell signal is created, and this crossing is the death cross.

Let us take a look at the chart above depicting the daily prices of Dangote Cement Plc in light blue, the 40 weeks, (200-day SMA) moving average in green and the 10 week (50-day SMA) moving average in purple. You will discover that on June 9th, 2017, the 50-day SMA crossed above the 200-day SMA forming a golden cross and signaling a buy. You will also discover that true to the prediction, the prices of Dangote Cement plc trended upwards after that golden cross and traded above its 200-day moving average. As can be seen on the chart, the trend reversed around March 21, 2018, and on June 22, 2018, the 50-day SMA crossed below the 200-day SMA forming a death cross and since then, the prices have trended down, and it does not look like a reversal is in sight any time soon.

What have we learnt from this chart?

What we have leant is that the crossover of the two moving averages on June 9th, 2017 indicated that it was about time to buy, and if you did go long on the crossover you would have bought at ₦169.038 and define your target exit price of which you would have been able to sell those at prices as high as ₦278 per share. However, if you cannot figure that out a target exit price, you could exit when the 50-day SMA crossed the 200-day SMA (the death cross) on June 21,2018, in which case you would have been able to sell at ₦239 per share. By so doing, you would have made ₦108.96 per share, if you exited at the target exit price or ₦69.96 per share, if you waited for the death cross to form. Give and take, you ended up with a gain. That is the beauty of moving average cross over system.

Moving average cross over alerts

Unfortunately, not a lot of people have the ability to calculate and track the moving averages of stocks on a daily basis let alone finding out when the prices cross above or below such moving averages. We will endeavor to identify stocks that exhibit cross overs and issue an alert as soon as we identify those. So, watch out for our moving average cross over alerts.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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