MORE WAYS TO USE MOVING AVERAGES -- 20-50 AND 13-34 EMA COMBINATIONS ARE STILL NEGATIVE -- SIMPLIFY MOVING AVERAGE SIGNALS -- YEN RALLIES IN FLIGHT TO SAFETY AS GLOBAL STOCKS SELLOFF

MORE SENSITIVE EMA CROSSINGS ... I got such an overwhelming response on Tuesday's message on using exponentially smoothed moving averages (EMAs) in conjunction with simple averages that I'd like to expand even further on the subject. One reader asked if shorter-term EMAs could be employed in a more volatile market. The answer is "yes". In fact, Carl Swenlin of Decisionpoint.com (and one of the regular contributors to the Stockcharts ChartWatch newsletter) employs a combination of 20 and 50 day EMAs. Trading signals are given when the shorter EMA crosses the longer. Chart 1 shows the 20-day EMA (blue line) crossing below the 50-day EMA (red line) near the start of February. That's the first time that's happened in nearly a year. An easy way to track those buy and sell signals is to plot the spread between the two EMAs as shown at the bottom of Chart 1. [You can create the black line by inserting 20,50,1 into the MACD indicator]. In that indicator, a sell signal is given when the black line crosses below its zero line which it did nearly a month ago. [Crossings of the zero line coincide with 20-50 EMA crossovers]. Chart 2 plots the 20-50 EMA spread (black line) on a daily S&P 500 chart for the last two years. Only three crossings of the zero line took place. A sell signal in June 2008 (first red circle), a buy signal last spring (green arrow), and a sell signal this month (second red circle). That makes this sell signal worth paying attention to.

Chart 1

Chart 2

13-34 EMA CROSSOVERS... I've explained may times before that my personal favorite moving average combination is the daily 13-34 day EMA (which is even faster than the 20-50 EMA combination). The two numbers are part of the Fibonacci number sequence and I've used them for years to good effect. Chart 3 shows the faster 13-day EMA (blue line) crossing below the slower 34-day EMA (red line) near the end of January. That downside crossover is confirmed by the 13-34 day EMA spread (black line) falling below its zero line at the bottom of Chart 1. That's the first downside crossing by that combination in eight months. One reader questioned the value of that combination because it stayed negative during the recent rebound. That's precisely why it's so valuable.

Chart 3

TOO MANY AVERAGES? ... Another reader complained that there are too many moving averages to keep track of. Let's try to simplify it a bit. The three moving averages we use most often are 20, 50, and 200 days. The 20-day is used in Bollinger bands and provides useful "short-term" signals. The 50-day average (or 10 weeks) is more useful for "intermediate" trend changes. The 200-day (40 weeks) is used for gauging a market's "long-term" trend. You can use those three averages by themselves or in combinantion (e.g. 20 versus 50 or 50 versus 200), and you can use their simple or exponentially smoothed versions. A lot of traders (including me) also use Fibonacci moving average combinations. [The most commonly used Fibonacci numbers are 5,8,13,21, and 34.] Chart 4 shows the 20, 50, and 200 day simple averages. During an uptrend, the 20-day should be the highest and the 200 day the lowest. The market will break the 20-day first and the 50-day second. A downside crossing of the 50-day by the 20-day is another sign of weakness (especially if the 50-day turns down). EMA crossings will take place a bit earlier. It's really not that complicated if you confine yourself to those three numbers (and maybe a couple of Fibonacci lines). Those are more than enough to keep you on the right side of the market.

Chart 4

DON'T STAY SHORT THE YEN ... One of readers asked last Thursday if I thought the Japanese yen was a good short sale against the U.S. Dollar. I thought it was at the time. Part of the reason was based on my view that the U.S. Dollar was overbought and due for a setback. So far, that hasn't happened. Then there is the price action in the yen itself. Chart 5 shows the yen surging back above 112 this week. It's well above its 50-day average (although the line is still dropping). I wrote last week that a move above 112.80 would negate my negative view of the yen. This week's rally in the yen, however, argues against staying short that currency against the dollar or any other currency. Chart 6 shows the yen hitting a new 52-week against the Euro. Renewed fears about Greece are keeping the Euro on the defensive and a bid under safe haven currencies like the dollar and yen. There's also a flight to safety into bonds as global stocks continue to weaken. With global stocks having failed at their 50-day averages, a drop toward their February lows is a strong possibility.

Chart 5

Chart 6