Trend Deviation and Moving Average (MA)

An alternative approach with trend-deviation indicators is to smooth out unwanted volatility with the aid of two Moving Average (MAs).

An alternative approach with trend-deviation indicators is to smooth out unwanted volatility with the aid of two Moving Average (MAs). The actual trend-deviation series is calculated by taking a 26-week Moving Average (MA) of the closing price divided by a 52-week Moving Average (MA). The second series is simply a 10-week Moving Average (MA) of the first. Buy and sell alerts are then triggered as the smoothed trend deviation indicator crosses above or below its 100week Moving Average (MA). Then look for a confirmation from the price itself.

A useful method that greatly reduces such whipsaw activity, but still offers timely signals, is to advance the 52-week Moving Average (MA) by 10 weeks when the trend-deviation calculation is being made. This means that each weekly close is divided by the 52-week Moving Average (MA) as it appeared 10 weeks before.

In this example, the whipsaw was filtered out since the trend deviation indicator fails to cross decisively below its Moving Average (MA). This is the only legitimate combination for weekly charts, but it is one that appears to operate quite well. There is always a trade-off when you try to make signals less sensitive and in this case we find that there is occasionally a small delay compared to the non advanced 52-week Moving Average (MA).

The most obvious one on this chart developed at the beginning of 1997, where the lagged series in the center panel crossed its Moving Average (MA) at a slightly higher price. In most instances though, this is a small price to pay if a costly whipsaw can be avoided.