A Closer Look at Moving Averages

Most of us have heard occasional mention about certain stocks displaying an important crossover of moving averages. The terms ‘Golden Cross' and ‘Death Cross' refer to crossovers of the most widely-followed indicators, the 50-day Simple Moving Average (SMA) and the 200-day Simple Moving Average. For example, in May of 2009, Starbucks' (SBUX) 50-day SMA crossed above its 200-day SMA as SBUX was rising off the 2008 low. That MA crossover was a ‘Golden Cross' pattern, suggesting the stock may continue moving to the upside.

Move to the upside it did. SBUX's 50-day SMA didn't cross below the 200-day SMA (a ‘Death Cross') until August of 2012, when the price of SBUX was 259% higher.

The pullback in SBUX stock didn't last long. In January of 2013, SBUX's 50-day SMA again crossed above its 200-day SMA. This rally lasted until March of 2014, after gaining another 35%.

Once again, the pullback didn't last long. In July of 2014, SBUX's 50-day SMA again crossed above the 200-day SMA. The 50-day SMA has not yet crossed below the 200-day SMA, and the stock is up another 43%.

So what I was curious about was if there are certain stocks that, over their recent history, have tended to stay in a ‘buy' mode after a Golden Cross, or in a ‘sell' mode after a Death Cross.

I was curious about other moving averages. I know some analysts pay attention to 50-day Exponential Moving Average (EMA) crossovers of 100-day EMA's. I also threw a test of 50-day SMA crossovers of 100-day SMA's into the pot.

I used my large watchlist of quality stocks I've maintained and fine-tuned over the years. Currently there are 471 stocks in this list. For most of them, I have over 30 years of data to test with.

So I wrote a test for each moving average pair and tested each stock over the amount of data I had – usually 30 or so years. I did a trading simulation on each stock by ‘buying at the market' when the fast moving average crossed above the slower moving average, and ‘selling at the market' when the faster MA crossed below the slower MA.

I set a minimum ‘Win Rate' filter, meaning the number of gains divided by the total number of trades had to be above 65%, and I set a filter for a minimum average gain of 5% per trade.

The first thing I learned is that by including short trades, ‘Death Cross' trades, into the simulations, I got no or very few results that passed my filters. But that isn't surprising. After all, there is a natural longer-term bias to the upside in the markets (we investors are generally optimistic and buy stocks expecting gains more often than we short stocks expecting drops). Also, my list of ‘quality' stocks tends to be comprised of ones that have performed well over the years and usually have good fundamentals.

So I excluded Death Cross (short) trades and immediately started to see some interesting results.

The following tables show some of the historically best stocks for trading Golden Crosses on. In other words, buying the stock when the faster MA crosses above the slower MA, and just holding on until the faster MA crosses below the slower MA. Then, you would just sit on the sidelines and watch for a Golden Cross to re-enter a position in the stock.

Here are the best results for each moving average pair:
(format:   <symbol>  <# gains>/<total trades>  (<Win Rate>)%  <net gain>%)

Golden Crosses of 50-day SMA/200-day SMA:

• ALL 6/8 (75.0)% 55.8%
• APH 9/12 (75.0)% 46.0%
• CHK 8/11 (72.7)% 256.8%
• CNI 8/10 (80.0)% 38.9%
• DLTR 8/12 (66.7)% 37.0%
• LUK 14/20 (70.0)% 30.2%
• MO 14/19 (73.7)% 28.8%
• NKE 14/20 (70.0)% 35.0%
• ORLY 7/9 (77.8)% 51.5%
• PDCO 9/12 (75.0)% 22.1%
• RNR 9/12 (75.0)% 22.4%
• VRSN 7/9 (77.8)% 119.6%

You will likely recognize many of these symbols – Dollar Tree Stores (DLTR), Altria (MO), O'Reilly Automotive (ORLY), Nike (NKE), Verisign (VRSN), and so forth.

I had to lower the filters slightly for the 50-SMA/100-SMA test, as the results were lower.

Golden Crosses of 50-day SMA/100-day SMA:

• AFL 25/38 (65.8)% 11.7%
• AGN 15/23 (65.2)% 20.9%
• CHD 28/40 (70.0)% 9.5%
• FAST 26/39 (66.7)% 13.2%
• FIS 13/18 (72.2)% 10.6%
• GD 20/29 (69.0)% 9.5%
• PX 19/29 (65.5)% 8.3%
• SPLS 21/32 (65.6)% 8.5%
• SRCL 15/23 (65.2)% 15.9%
• TTC 27/35 (77.1)% 15.6%
• VRX 13/20 (65.0)% 53.2%

The more-sensitive Exponential Moving Averages produced better results for the 50-day EMA/100-day EMA test.

Golden Crosses of 50-day EMA/100-day EMA:

• CHD 18/27 (66.7)% 15.7%
• DHR 21/30 (70.0)% 17.4%
• HUM 14/18 (77.8)% 41.0%
• ITW 19/28 (67.9)% 11.4%
• KLAC 12/18 (66.7)% 50.6%
• MAR 9/13 (69.2)% 18.5%
• ORLY 11/16 (68.8)% 32.8%
• WAB 12/17 (70.6)% 16.3%

Now I am not saying the crossover approach should be used as a standalone trading system on these, or any other stocks. Most commonly, professionals use the crossover status to help filter out trade candidates selected via other strategies.

In looking at many charts, I see that many stocks have recent crossovers of 50-day EMA's above 100-day EMA's, or their 50-day EMA's have stayed above the 100-day EMA's for quite some time. This leads me to believe the current market pullback may be only temporary. Instead of adding more downside protection, I'm inclined to identify good longer-term stocks and wait for higher probability setups in their charts to enter positions.

In today's Seasonal Forecaster newsletter I cover the second part of this analysis, where I was used the information to look for stocks that seem to be longer-term steady gainers – stocks that pretty much spend their life in a ‘Golden Cross buy mode', staying above the 200-day or 100-day longer-term moving averages, And I want to keep an eye on this select list of stocks, watching for Golden Crosses as they form.

Several of the above stocks have recently announced good earnings results, adding on to their already good fundamental picture. And in most cases the stocks have responded positively. For example, on Tuesday Fidelity National Information Services (FIS) announced a 40% jump in revenue, beat earnings expectations by 5%, they reported higher margins, and reaffirmed guidance. The stock jumped at the open and closed up 6.1%. The stock actually had 50-day SMA and EMA crosses above the 100-day SMA/EMA's a couple of weeks ago.  One of the above tables shows the stock has averaged a 10+% gain from here.

In today's newsletter I cover a trade setup on another stock that seldom has moving average crossovers. After most crossovers it has tended to continue in that new direction for a lengthy period of time, and the stock's recent rebound has just produced a new Golden Cross. The company produces a basic product needed no matter what shape the economy is in. It has gone through two years of declining revenues and earnings, but a new CEO is quickly showing turnaround results and several insiders have bought the stock. The stock has averaged an 18.2% gain after each Gold Cross, but setups similar to the current one have produced 85%, 158%, and 55% gains in recent years.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

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