**Streetwise for Sunday, March 4, 2018**

One of the most popular and interesting predictors of possible stock market trends are moving averages. A moving average analysis is designed to reveal the underlying direction and rate of change of a volatile series of numbers.

When you calculate a moving average, you are eliminating or “averaging out” short term fluctuations. It is called a “moving” average because for each period under consideration, the base with which the average is calculated, is being updated.

By studying the movement of current prices in relation to a long-term moving average of those prices, it is theoretically possible to predict a major trend reversal before it occurs. At a minimum, the analysis should confirm the reversal shortly after its occurrence.

While the theory might sound a bit complicated, in practice moving averages are quite simple. For example, assume you wanted to compute the 200-day moving average for an index such as the Dow Jones industrial average. Simply add together the index’s closing number for each of the past 200 days, then divide by 200.

Repeat this process every day, only drop off the oldest number, and add in each new day’s closing figure. The resulting moving averages could then be plotted and compared against a graph of the index itself. Computers are almost always delegated to do this sort of analysis.

One disadvantage of the simple moving average is that it is slow to respond to a significant and rapid change in market activity. To overcome this problem, some sort of weighting algorithm is applied that places emphasis on recent price activity.

For the most part, veteran analysts often utilize a 200-day moving average and interpret the results as follows:

1. If the 200-day moving average line flattens after a previous decline, or is advancing, and the stock price or stock index line penetrates the moving average line on the upside, this is a major buy signal.

2. If the stock price or index line falls below the 200-day moving average line, while the moving average line is still rising, this is a buying opportunity.

3. If the stock price or index line is above the 200-day moving average line, declines toward the 200-day average, fails to penetrate and then moves upward, this is also a buying opportunity.

4. If the 200-day moving average line flattens after a previous rise, or is declining, and the stock price or index line penetrates the moving average line on the downside, this is a major sell sign.

5. If the stock price or index line rises above the 200-day moving average line while the moving average line is falling, this is a selling opportunity.

6. If the stock price or index line is below the 200-day moving average line, moves toward the moving average line, fails to go through, and turns back down, this is a time to sell.

Unfortunately, there are no panaceas on Wall Street and moving averages are no exception. When stock prices are moving up and down within a fixed range, moving average analysis can become a nightmare. As the price or index line cuts back and forth through the moving average line, many buy and sell signals are given. An investor trying to follow all these signals would probably end up being “whipsawed” by the market.

If you enjoy the exercise, pick a group of stocks and determine how many are selling above their 30-week moving average. If the ratio of those that are above, to the total number, exceeds 50 percent and is trending upward, the outlook is bullish. If it drops below 50 percent, and/or is trending downward, then there is trouble ahead.

Keep in mind that the longer the time span of a moving average, the greater the significance of a crossover signal. Therefore, an 18-month chart is more reliable than a 30-day chart.

Moving averages are certainly not foolproof. However, by understanding their strengths and weaknesses and applying them appropriately, you can increase your probability of investment success.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.