Wednesday, November 08, 2006

The Importance of the 90

The 90 period EMA that is - if you don't know what and exponential moving average is I suggest you look it up. On the following charts (2 year weekly) the blue line is the 90 period EMA and the red line is the 200 period simple moving average. If you can't tell just by looking how important the 90 EMA is to understanding what a stock is doing then you need more than your eyes examined.

So when people start talking about the 200 period this or the 200 period that tell them to take 90 and get real.

The other average shown (in green) is the 21 period EMA. I use that average as a gauge to determine whether the stock will be a candidate for reversion to the mean. Whenever it gets too far away from the 90 it seems to want to scurry back. Of course, "too far" is a nebulous term that can mean just about anything. If you watch the stocks for awhile you can pretty much judge what "too far" is just by eye.

No comments: