July 26, 2010
Mish's Daily Articles
By Mish Schneider
Inserted into all of my daily charts are 4 basic moving averages; The 10, 30, 50 and 200. We use these as guides for finding trends. If the 10 is above the 30, and the 30 above the 50, and the 50 above the 200 day moving average, we call this "stacked". If the direction of the moving averages is turned upward, we call that "sloped." The optimum setup is when the price of any financial instrument is above the "stacked and sloped "4 moving averages. We have back tested this to find that it has great predictability in finding trades that are the most ready to make parabolic moves up. Our Nuggets List specifically scans for that scenario.
But what if the market is in a negative phase and there are very few setups where the moving averages are perfectly stacked and sloped? In the last month, I have found several amazing trades that were under the 200 day moving average or in a negative phase, yet first found a level of support, and then gathered some momentum when the 10 day moving average crossed over the 50 day moving average. The slope on the 10 day was positive; the slope on the 50 was neutral to positive. Today, we will look at CSIQ and BTU, which absolutely fit that scenario. Then, we will analyze WY, which is currently trading above the 200 day moving average yet the 10 and the 50 day moving averages are still below the 200. Of interest is the potential follow through once the 10 (sloped up) crosses over the 50 (currently sloped down).
Canadian Solar, Inc. (CSIQ)
CSIQ, after finding support at recent lows (8.99), proceeded to base for a couple of weeks with a $3 range from $9.00 to $12.00. Then, on July 19th, the 10 crossed the 50 day moving average. The 10 had a positive slope, while the 50 remained slightly negative to neutral. On the same day, CSIQ tested 12.00, which turned out to be a low risk point for a long entry. We recommended a buy over the prior day high 12.75, once we saw the moving averages cross. At time of writing this article, CSIQ rallied to over 14.00, we had locked in 1.5 ATRs for miniswing traders. Swing traders would still be long. Target is a run to the 200 day moving average or around $19.00
Peabody Energy (BTU)
On July 6th, the 10 day crossed the 50 day moving average in BTU. The slope of the 10 was neutral, the 50 negative. But, since it had established a base under 36, rallied and consolidated in a price range from 38-40, the risk was clear once the moving averages crossed. The high that day was 41.64. On July 7th, we entered a long position over the high of the day prior. Our risk was for a swing trade was under the July 6th low or 39.75, which also corresponded with the 30 day moving average. The risk for a miniswing trade would be under the point where the moving averages converged on July 7th or at around 41.10-less than 1/2 ATR from entry. On July 22nd, BTU crossed the 200 day moving average. At this point, miniswing traders might have exited, but had a new opportunity to go long. Swing traders with an already $2.50 profit, had an opportunity to add to the position. Next real point of resistance is at $50.00
Weyerhaeuser Company (WY)
This setup is also extremely interesting. Notice that on July 12th; it gapped up higher, thereby establishing that the 2 weeks prior were an unbelievable bottom. Unbelievable because it had gapped down on June 28th leaving both a "V "and "Island Bottom" when it gapped up on July 12th - extremely rare and powerful! If anybody reading this caught that - please email me because you're my hero!
Then, on July 22nd, the 10 crossed the 50 day moving average-upward slope on the 10-downward on the 50, and WY traded over the 200 day moving average. A long was established at 15.85 based on an opening range breakout. Risk was to under the 200 day moving average. Again, regardless of your trading timeframe, you have profits. Only caveat for position/swing traders is the earnings report due July 30th. But, we are carefully watching to see what happens when the 10 converges with the 200 day moving average as an indication of how much more this stock can run.
The technical term for the type of signal written about here is called "Crossover." The Crossover is a classic way to identify shifts in momentum. A great source for a basic primer on moving averages is Investopedia.com. The one described here not only helped us to identify these momentum shifts, but also gave us a great tool for managing risk.