Read and Interpreting Moving Average

The major technical principles of interpreting Moving Averages are as follows:

An Moving Average is a smoothed version of a trend, and the average itself is an area of support and resistance. In a rising market, price reactions are often reversed as they find support in the area of the Moving Average. Similarly, a rally in a declining market often meets resistance at an Moving Average and turns down. The more times an Moving Average has been touched, that is, when it acts as a support or resistance area, the greater the significance when it is violated.

A carefully chosen Moving Average should reflect the underlying trend; its violation therefore warns that a change in trend may already have taken place. If the Moving Average is flat or has already changed direction, its violation is fairly conclusive proof that the previous trend has reversed.

If the violation occurs while the Moving Average is still proceeding sharply in the direction of the prevailing trend, this should be treated as a preliminary warning that a trend reversal has taken place. Confirmation should await a flattening in the angle of ascent or descent, a change in direction in the Moving Average itself, or alternative technical sources. The crossover of a moving average with a sharp angle of ascent or descent is akin to the violation of a trendline with a sharp angle.

Generally speaking, the longer the time span covered by an Moving Average, the greater the significance of a crossover signal. For instance, the violation of an 18-month Moving Average is substantially more important than the crossover of a 30-day Moving Average.

Reversals in the direction of an Moving Average are usually more reliable than an Moving Average crossover. In instances in which a change in direction occurs close to a market turning point, a very powerful and reliable signal is given. However, in most instances, an average reverses well after a new trend has begun and so is only useful as a confirmation.

In short, think of an average as a type of moving trendline that obtains its significance from its length (time span), the number of times it has been touched or approached, and its angle of ascent or descent.