Invest and Trade Profitably with Jon Johnson

I have noticed that the NASDAQ weekly is having trouble with the 50ema crossing the 200ema. Do you pay heed to this or is this not of consequence?

August 30, 2000

Moving average crossovers are a technical analysis tool that can be useful in predicting advances or declines in the movement of a stock or index. A crossover simply describes the movement of one moving average crossing over a second, with one being shorter (faster) or longer (slower) than the other. Crossovers can give buy or sell signals for shorter or longer term moves of a stock or index. We watch for crossovers, up or down, both intraday or longer term to give us a better idea as to future moves and thus better buy or sell points.

For an intraday example, consider a stock that is moving up its 5-minute moving average and occasionally bouncing off its longer 15-minute MA. If it crosses below the 15-minute MA and fails on a test to break back over, that is usually a signal that the stock is going to sell down from there at least in the short term. When a stock is trending down intraday, the 5-minute MA will move up to test the 15-minute, but will fail. If it breaks back over the 15-minute MA, tests, and then continues to move up, that’s a sign that the stock is moving up in the short term.

A longer term scenario is what you describe in your email with the Nasdaq. To start this month, on a daily chart the Nasdaq’s 18 EMA crossed back down through the 50 EMA, and the market sold off. Essentially the index has shown this crossover twice since early March, and that has kept the index trending lower all year. Now we see the 18 day EMA coming back up toward the 50 day MA; it will make a key test over the next couple of weeks. If it can break through that is a sign of further near term advance.

Crossovers are important indicators which work best when used with other technical analysis tools like price patterns, volume, or trend analysis. When a crossover occurs at a key support or resistance level, the trading signal can be even better.

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