Trading Smart With Moving Averages-080811

KDN PP 1408/11/2011 (026862)
Trading Smart with…
TECHNICAL
Analysis – Part 2
All about Moving Averages…
Trading Smart with Technical Analysis Part 2: All About Moving Averages [1 ]
Contents
Introduction to moving averages ...............................................................3
What is a moving average?....................................................................................3
Why the lag? ..........................................................................................................3
Popular moving averages ......................................................................................4
Popular moving averages..............................................................................5
One of the oldest and reliable indicators................................................................5
How to use moving averages ......................................................................9
Strategies using moving averages...........................................................17
Single crossover ............................................................................................18
Double crossover ...........................................................................................20
Triple crossover .............................................................................................23
Moving average price channel (MAPC)...................................................25
Moving average compression (MAC) .......................................................30
MACD .................................................................................................................36
Putting it all together ...................................................................................44
Nigel Foo +6(03) 20849293 – nigel.foo@cimb.com

Kong Seh Siang +6/03) 20849289 sehsiang.kong@cimb.com
Trading Smart With Technical Analysis – Part 2: All about “Moving Averages” – August 2011 [ 2 ]
1
Introduction to moving averages
The trend is your friend
What is a moving average?
A moving average (MA) is basically an average value of data over a specified time period. An MA smooths the price
data to form a trend-following indicator. MAs do not predict price direction but define the current direction though
with a lag.
Why the lag?

MAs lag simply because they are based on past prices. However, this is not a bad thing as they filter out the
“noise” in the market and only identify the main trend. Furthermore, many popular technical indicators like
MACD and Bollinger Bands are based on MAs.
Popular moving averages
The two most popular types of MAs are the simple moving average (SMA) and the exponential moving
average (EMA). Both these MAs are usually used to identify the trend or define potential support and
resistance levels.
A simple moving average (SMA) is formed by computing the average price of a security over a specific
number of periods. For example, a 5-day SMA is the sum of the closing prices for the last five days divided
by five. The EMA is different from SMA as it applies more weight to recent prices. The weighting applied to
the most recent price depends on the number of periods in the moving average.
SMA or EMA?
Although EMA has less lag than SMA, we found from experience that one is not necessarily better than the other.
EMAs are more sensitive to recent prices while SMAs may be better in identifying support or resistance levels. We
will talk more about support and resistance levels in future chapters.
1.1: Daily line chart for US’s Nasdaq Index
20-day SMA;
Dotted line 20-day EMA
Source: Bloomberg & CIMB Research
2
Popular moving averages
Whoever buys at the bottom and sells at the top is either lucky or a liar
One of the oldest and reliable indicators

MAs are very popular with investors and traders worldwide. Among the many technical indicators, MA is one of the
oldest and useful indicators in technical analysis, particularly in identifying major trends. In the stockmarket,
common and popular MAs used are the 50-day SMA, 200-day SMA and the 20-day SMA.
The 200-day SMA is mainly used by investors to identify long-term trends (more than six months) while the 50-day
SMA is used for medium-term trends (1-3 months). Investors or traders with a short investment horizon use the 20-
day SMA to identify short-term trends (1-3 weeks). Intra-day traders use the 5, 15, 30 and 60-minute SMAs to
identify very short-term trends.
Figure 2.1 shows the daily chart for the Dow Jones Industrial Index (DJIA) with the 200-day SMA and the 150-day
SMA. The 200-day SMA is generally used by most investors to identify the long-term trend indicator. However,
back-testing suggests that the 150-day SMA is a better long-term indicator for the DJIA than the 200-day SMA as
the 150-day SMA was able to identify the index’s long-term major turning point. This shows that the 200-day SMA is
not the perfect long-term trend indicator for all stocks and equity indices. Different stocks and equity indices have
different long-term time cycles. As such, one must always back-test to find the best SMA for each stock or index.
Figure 2.2 shows Citibank’s daily chart with the 200-day SMA. In this example, the 200-day SMA was an excellent
indicator of the long-term trend. From 2007 to 2009, the 200-day SMA was a major resistance for Citibank’s share
price which was unable to overcome its 200-day SMA until mid-2009. Investors who followed the 200-day SMA
would have been able to avoid Citibank’s 2007-2008 price collapse.
2.1: Daily line chart for Dow Jones Industrial Index
200-day SMA
150-day SMA
2.2: Daily line chart for Citibank
200-day SMA
Let’s look at the 50-day SMA for the Hang Seng Index’s daily chart. This SMA was a good medium-term trend
indicator for the index from 2009 to 2010. The 50-day SMA was also a great support indicator. However, from end-
2010 onwards when the Hang Seng Index was trading sideways, the 50-day SMA lost its effectiveness. This is not
a surprise as this is one of the main weaknesses of MAs, i.e. they are not effective in a non-trending market. In the
next few chapters, we will show some of the ways to use SMAs in non-trending markets.
2.3: Daily line chart for Hong Kong’s Hang Seng Index
50-day SMA
Not effective in
sideways market
Source: Bloomberg
The 20-day SMA or the 4-week SMA is another popular SMA used by investors and traders. The 20-day SMA is
basically a one-month cycle as there are 20-24 trading days in a month, depending on the month. Figures 2.4 and
2.5 show Google’s daily chart with different SMAs. Figure 2.4 uses the 20-day SMA while Figure 2.5 uses the 30-
day SMA.
Close analysis of both the charts reveals that Google’s 30-day SMA is a better support indicator than the 20-day
SMA. The 30-day SMA, which is a longer SMA, is less sensitive to the 20-day SMA, leading to less whipsaw and
false signals. This example emphasises again the importance of back-testing with different SMAs.
2.4: Daily line chart for Google with 20-day SMA
Source: Bloomberg
2.5: Daily line chart for Google with 30-day SMA
30-day SMA
Source: Bloomberg
3
How to use moving averages
If at first you don’t succeed, you are running on average
There are a few ways to use MAs. The main reason to use MAs is to identify a main trend and when it has
ended. As the MA is a lagging indicator, it does not lead a trend and only confirms when a trend has started.
Figure 3.1 shows the daily crude oil price with the 200-day SMA. When crude oil price rose above the 200-
day SMA in early 2007, it marked the start of a long-term uptrend. In 3Q08, crude oil price broke below the
200-day SMA, a sign that the long-term uptrend had ended and the dominant trend was the long-term
downtrend.
3.1: Daily bar chart for crude oil price
Uptrend
Downtrend
200-day SMA
Figure 3.2 shows the daily chart for crude palm oil (CPO) with its 50-day SMA. The 50-day SMA was a good
support indicator and provided support for most of 2007. However, CPO price started to trend sideways in Mar-Jun
2008. By early 3Q08, it had broken down sharply below the 50-day SMA, indicating the start of a medium-term
downtrend until end-08.
3.2: Daily chart for crude palm oil (RM/tonne)
Sideways
Uptrend
Downtrend
50-day SMA
The second reason to use MAs is for identification of support and resistance levels. Figure 3.3 shows the daily chart
of Indonesia’s Jakarta Composite Index with the 200-day SMA. Notice how this SMA worked as a support and
resistance indicator for the index over the past few years. In early 2008, once the 200-day SMA support was
broken, the JCI went into a bear market until end-08. In mid-2009, the JCI rallied past its 200-day SMA, which
became a major resistance. Since then, it has found strong support at the 200-day SMA. It looks like the JCI’s long-
term uptrend will be intact till the 200-day SMA is broken.
3.3: Daily chart for Indonesia’s Jakarta Composite Index
200-day SMA
Figure 3.4 shows the daily chart of South Korea’s Kospi with the 50-day SMA. The 50-day SMA was a good
medium-term support and resistance indicator for the index. At end-07, the Kospi broke below the 50-day SMA.
This was the start of a one-year downtrend for the index. There was a rebound in Mar-Jun 2008 but once the 50-
day SMA support gave way in Jun 08, the index declined sharply till end-08.
3.4: Daily chart for South Korea’s Kospi
50-day SMA failed

support
50-day SMA
The third reason to use MAs is as a measure of short-term and long-term momentum of a trend. For example, the
chart below is the daily chart for Goldman Sachs. After trading sideways for more than six months, the 200-day
SMA line started to hook downwards in Feb 08. This indicated that Goldman Sachs’s long-term trend has started to
turn downwards. However, the short-term downtrend has already started as the 30-day SMA fell sharply from end-
07 onwards.
3.5: Daily chart for Goldman Sachs
30-day SMA
200-day SMA
Figure 3.6 is the daily chart for Thailand’s SET Index. Since 2008, SET’s 150-day SMA has been on a downtrend
and only bottomed out in Jun 09. After that, the 150-day SMA started to turn upwards, a strong sign that the index’s
long-term uptrend has started. However, the short-term uptrend was already strong, as seen from the sharp rise of
the 20-day SMA since Apr 09.
3.6: Daily chart for Thailand’s SET
20-day SMA
150-day SMA
Source: Bloomberg
The last reason to use MAs is to determine the levels to close “long” positions or put “stop loss” positions. Figure
3.7 is the daily chart for Malaysia’s Genting with the 150-day SMA. One simple but effective long-term strategy
would be to buy Genting when the stock is above the 150-day SMA. Once the stock broke below the 150-day SMA,
the investor should sell or cut losses.
Investors who followed this strategy from 2006 to 2011 rode the stock’s long-term uptrend and avoided the bear
market. Although there were a few failed signals along the way, the losses were marginal compared to the potential
profit from riding the long-term uptrend and downtrend. Notice that by using the MAs as a buying trigger point, an
investor never buys at the bottom or sells at the top. Isn’t that a great tool? Nobody sells at the top and buys at the
bottom.
3.7: Daily chart for Malaysia’s Genting
150-day SMA
support
Source: Bloomberg
Figure 3.8 shows the daily chart with the 65-day SMA for Malaysia’s SP Setia. In 2006-2007, this SMA was a good
medium-term support indicator for the stock. However, for six months from mid-07, the stock was basically in a
triangle and use of the 65-day SMA as a buy and sell signal would have led to a string of failed signals. However,
the losses would have been marginal.
Furthermore, one would have been able to escape the sharp decline from Mar 08 onwards. One should also
combine the knowledge of pattern formation in technical analysis. By early 2008, there were signs of a potential
bearish descending triangle formation from the mid-2007 peak.
3.8: Daily chart for Malaysia’s SP Setia
Resistance trendline
Escape Mar-08 sell-off
65-day SMA
, bearish descending triangle, support trendline
4
Strategies using moving averages
Different strokes for different folks
There are many ways to use MAs. Some investors use MAs as buy and sell signals. Others use MAs as a
sign of a change in the trend. In this chapter, we highlight a few strategies in the use of MAs. One of the main
weaknesses of MA is that it is not effective in a trendless market. We will show some of the methods to
overcome this shortcoming in this chapter.
Single crossover
The single crossover is the basic type of signal. Figure 4.1 is the 2007-08 daily chart for CPO with the 20-day
SMA. A buy signal is triggered when the CPO price rises above the 20-day SMA, which is a likely indication
of the beginning of an immediate uptrend. A sell signal comes when the current market price of CPO falls
below the 20-day SMA, indicative of the start of an immediate downtrend.
The 20-day SMA acts like a buy and sell indicator. This strategy is simple but effective as it removes all
emotions from the investor, as seen from the signals triggered for most of 2007. However, during Apr-Jun
2008 when CPO price was trading sideways, this triggered many false signals. From Jul 08 onwards, the 20-
day SMA acted as a resistance until the end of 2008.
4.1: Daily chart for crude palm oil with 20-day SMA
Major sell signal !
SMA is resistance
20-day SMA
Figure 4.2 shows the daily chart with the 20-day SMA for soya bean. From mid-2010, soyabean price was in a
strong uptrend till early 2011. The use of the 20-day SMA as the signal would have been very profitable. However,
since early 2011, soyabean price has traded sideways in a triangle consolidation. During this sideways period, the
20-day SMA signal was not effective.
4.2: Daily chart for soyabean (US$/lb)
Triangle sideways formation?
20-day SMA
Double crossover
The double crossover is the most popular method among investors and traders. A buy signal is triggered when the
shorter average crosses the longer moving average. The double crossover method lags behind the market but
produces fewer failed signals. Figure 4.3 shows the daily CPO chart with 5-day SMA and 20-day SMAs. In a
trending market, the 5-day SMA and the 20-day SMA are great indicators. But when the trend is sideways, there
are quite a few failed signals, which is unavoidable with the use of MAs.
4.3: Daily chart for crude palm oil with 5-day SMA and 20-day SMA
S
S
Failed signal
S B
20-day SMA
S
B B
Failed signal
Figure 4.4 shows the daily chart of gold with the 12-day SMA and the 48-day SMA. Both these two SMAs were
effective in identifying the signals to ride gold price’s uptrend from mid-2010. The sell signals failed in Jan 2011 and
Jun 2011 as gold prices bounced back. However, any losses from the failed signals would have been more than
offset by the potential profits from riding the strong uptrend. In trading, no one wins all the time. More important,
losses from the failed signals are offset by the profits from riding the trend.
4.4: Daily chart for gold prices with 12-day SMA and 48-day SMA
S B
12-day SMA
B
S 48-day SMA
A popular double crossover among commodity players is the 13-week SMA and the 26-week SMA. This SMA
combination was an effective signal indicator, even during 2010 when crude oil price saw sideways action for most
of the year. The 26-week SMA spans twice the period of the 13-week SMA.
4.5: Weekly chart for crude oil (US$/barrel)
S
13-week SMA
26-week SMA
Triple crossover
One can also use the triple crossover when trading. This uses another moving average to increase the
effectiveness of the signal. Figure 4.6 is South Korea’s Kospi with the 10-day, 20-day and 30-day SMA. The buy
signal is triggered when the shorter SMA – in this example, the 10-day SMA – crosses both the 20-day SMA and
the 30-day SMA from below. The sell signal is triggered when the 10-day SMA cuts the 20-day SMA and 30-day
SMA from above.
4.6: Daily chart for South Korea’s Kospi with 10-day, 20-day and 30-day SMA
Failed signal
Figure 4.7 shows gold price’s daily chart with the 10-day, 20-day and 30-day SMA. This triple SMA combination
was reliable in catching the major trends in 2008-09. Even when the signal failed, the loss was relatively small.
4.7: Daily chart for gold prices with 10-day, 20-day and 30-day SMA
Failed signal S
B
S
B
B B
Moving average price channel (MAPC)
One of the ways to overcome the false signals or whipsaws when using the double crossover system is by setting
up a moving average price channel (MAPC). Figure 4.8 shows an example of an MAPC with silver prices. There
are two SMAs in this chart. The first is the 20-day SMA of its high price and the second is the 20-day SMA of the
low price. The space between both the SMAs is the price channel.
One can use the 20-day SMA (high) as resistance. Breakout above the 20-day SMA (high) is a bullish trend. The
20-day SMA (low) can be used as a support. Any break below this SMA would be a bearish sign, indicating that a
downtrend is taking place.
4.8: Daily chart for silver price with 20-day SMA (high) and 20-day SMA (low)
resistance
resistance support
support
support
Source: Bloomberg& CIMB Research
Buy and sell signal using price channel and crossover. In Figure 4.9, we use the 5-day SMA as the signal. The
buy signal is confirmed when the 5-day SMA crosses above the 20-day SMA (high). A sell signal is confirmed when
the 5-day SMA crosses below the 20-day SMA (low). Use of a price channel reduces the number of false signals or
whipsaws. We emphasise again that in the use of price channels, one needs to back-test to identify the relevant
price channel and signal line for that particular stock or Index. Not all markets work well with the combination
highlighted below.
4.9: Daily chart for Malaysia’s KLCI with 20-day SMA (high), 20-day SMA (low) and 5-day SMA
20-day SMA(high)-resistance
Buy signal
Sell signal
20-day SMA (low) support
5-day SMA
Works for Apple. Figure 4.10 shows that the 20-day SMA price channel and the 5-day SMA signal line worked well
for the stock in both the uptrend and the downtrend. The 20-day SMA (high) proved to be a major resistance for the
5-day SMA in a downtrend market. The buy signals using this method provided a great signal in Mar-Jun 08.
Although the buy signal failed in Aug, the losses were marginal.
4.10: Daily chart for Apple Inc with 20-day SMA (high), 20-day SMA (low) and 5-day SMA
Sell signal
Sell signal Buy signal failed but
great sell signal
Buy signal
Failed “sell” signals for CPO. For CPO, the buy signal worked well in a major uptrend but the sell signals were
too late. What works for Apple Inc might not work for CPO. One way to overcome this problem is to use a shorter
SMA like the 10-day SMA instead of the 20-day SMA. The sell signal is when the 5-day SMA cuts the 10-day SMA
from above, triggering the “sell” signal much earlier.
4.11: Daily chart for crude palm oil with 20-day SMA (high), 20-day SMA (low) and 5-day SMA
Just like CPO. Figure 4.12 shows Nasdaq’s daily chart with the 20-day SMA price channel and the 5-day SMA
signal line. The results were similar to CPO. In an uptrend, the sell signals were too late. By the time the signal was
confirmed, the index was already close to the bottom. However, in a downtrend, the 20-day SMA (low) proved to be
a major resistance for the index.
4.12: Daily chart for crude palm oil with 20-day SMA (high), 20-day SMA (low) and 5-day SMA (RM/tonne)
Moving average compression (MAC)
Moving average compression (MAC) happens when a number of moving averages meet at one point. This is
significant as this is the period when short-term and medium-term investors think the same way at the same time.
Markets tend to be explosive once the compression ends. In these examples, we use the 10-day, 20-day, 25-day,
30-day and 35-day SMAs. Figure 4.13 is Google’s daily chart with the various SMAs. Periods when the SMAs were
compressed were usually followed by huge rallies or sharp declines, as shown by the arrows below.
4.13 : Daily chart for Google
Figure 4.14 is Genting Singapore’s daily chart with the various SMAs. In a major uptrend, the MACs were reliable
buy indicators for the stock. Rallies were strong once the stock broke out. However, the sell signals were rather
late.
4.14: Daily chart for Singapore’s Genting Singapore (S$)
Failed sell signal Failed sell signal
Buy
Buy
Buy
Buy
Like Genting Singapore’s example, the MAC for the Hang Seng Index was effective for its buy signal but the sell
signals were rather late. However, this is not surprising. In a bear market or downtrend, markets fall faster and
sharper compared to a slow and steady climb in a bull market. As MAs are lagging indicators, they are less
effective in a bear market.
To overcome this weakness, one could use just the combination of 10-day SMA crossing the 20-day SMA from
above as a sell signal instead of using the MAC. This SMA signal combination is definitely faster in detecting the
start of a downtrend.
4.15: Daily chart for Hong Kong’s Hang Seng Index
Sell
Sell
Buy
Sell
Buy
Buy
Sell signals for the S&P500. However, in some markets, the MAC works well as a sell indicator too. The chart
below is the S&P500 in 2007-08. From the Oct 07 peak, the moving average compression strategy was able to
identify the start of its downtrend accurately. This example shows the importance of back-testing.
4.16: Daily chart for S&P500
Sell
Sell
Sell
Buy Sell
Sell
The MAC also works in intra-day charts. Below is the 150-minute chart for crude oil prices. The MAC managed to
show more than half of the buy and sell signals. This signal only failed when crude oil price fell sharply in a short
period like in mid-April 2011.
4.17: 150-minute chart for crude oil
Failed sell signal
Using the MAC, the 15-minute chart for gold prices also identified a few buy and sell signals in late July. The buy
signals were effective but as expected, the sell signals from MAC were too slow. It appears that MAC is better at
identifying buy signals rather than sell signals.
4.18: 15-minute chart for gold price
5
MACD
In the mood for a “MacD”?
The moving average convergence divergence indicator, better known as the MACD, was developed by
Gerald Appel in the 1970s. The MACD is today one of the most popular technical indicators used by traders
all over the world. Its strength lies in its simplicity. The MACD can also be used either as a trend or
momentum indicator.
What has moving average got to do with MACD? The MACD indicator is derived from the moving
averages but in this case, the exponential moving average (EMA). The MACD does not use the simple
moving average (SMA). There are two lines in the MACD indicator. First is the MACD line, which is the
difference between the 12-day EMA and the 26-day EMA. The second line, also known as the signal line, is
the 9-day EMA of the MACD line.
Simple buy and sell signal for MACD. The buy signal is confirmed when the MACD line cuts the signal line
from below. The sell signal comes when the MACD line cuts the signal line from above, as seen in example
5.1. This sounds easy and the buy and sell signal actually works fine in a trending market.
5.1: Daily chart for Dow Jones Industrial Index
MACD line is zero when 12-day

EMA meets 26-day EMA
Too many false signals. However, one of the MACD’s weaknesses is the number of false signals. The chart
below shows Thailand’s SET Index daily chart in a steady uptrend from Jun to Nov 2010. However, during
that period, there were in total eight “buy and sell” signals. When the index traded sideways from Nov to Jan,
there were four buy and sell signals.
5.2: Daily chart for Dow Jones Industrial Index
Adding another filter to smooth the trend. To minimise MACD’s false signals, one could add another filter.
For example, the MACD’s buy signal must be supported by an index that is above the 20-day SMA. The
MACD “sell” signal must be supported by a break below the 20-day SMA for the index. Using the 20-day SMA
filter, from Jun to Nov 2010, there was only one buy signal in June and the sell signal was in Nov. However,
from Nov to Jan, there were still a few false signals. This is expected in a sideways market. No matter what
MA indicator one uses, it loses its effectiveness in a sideways market.
5.3: Daily chart for Thailand’s SET Index
Weekly chart to eliminate the noise. We like to use weekly price charts and the MACD to minimise the
“noise” in the market. In Figure 5.4, the weekly chart for Thailand’s SET shows a sell signal from the MACD in
Oct 09 but the index saw sideways action till Jun 2010. There was a buy signal in Mar 2010 but by the next
month, a sell signal was confirmed. What we see is that in a sideways market, false signals do happen but
the losses are marginal. Once a major trend kicks in, the potential profits are more than sufficient to cover the
small losses.
5.4: Weekly chart for Thailand’s SET
Source: Bloomberg
Look for divergence signs. Other than a trend indicator, the MACD can also be used to measure
momentum. This is where terms like the positive and negative divergence signs come into play. Usually in an
uptrend or a downtrend, technical indicators like MACD and RSI move in tandem with prices. When this does
not happen, we call this scenario either positive or negative divergence.
Let’s look at one of the best examples – the weekly chart for the S&P500 in 2008-09. When the S&P500
reached a new low in Mar 09, the weekly MACD and RSI indicator did not record a new low but instead
achieved a higher low. This is called positive divergence. Momentum-wise, this indicates that the selling
pressure from Jan to Mar 09 was not as strong as the selling momentum from May to Nov 08. This usually
means that the downtrend is at the tail-end or has just ended.
5.5: Weekly chart for S&P500 Index
Negative divergence example. CPO price trended upwards from Aug to Dec 2010. However, the daily
MACD and RSI indicators were already showing negative divergence signs in Nov 2010. While CPO price hit
new highs in Nov-Dec 2010, the MACD and RSI indicators were recording lower highs during that period. We
call this negative divergence.
This indicated that the upward momentum was losing strength. In Jan 2011, the daily MACD indicator broke
below its support trendline. However, CPO price still managed to record a new high in Nov 2011 before a
medium-term correction kicked in. This also shows that no indicator works perfectly all the time.
5.6: Daily chart for crude palm oil
MACD/RSI showing negative divergence signs
Support trendline broken
Another MACD negative divergence example. The weekly chart for Indonesia’s Jakarta Composite Index
shows that the weekly MACD peaked at end-2010 and has been showing negative divergence signs since
then. However, the index continued to scale new highs in Jul-Aug 2011. This example shows that negative
divergence signs can sometimes be sustained for months before the major trend reverses.
As the 200-day SMA or 40-week SMA has been a strong support indicator, MACD negative divergence
supported by the breakdown of the 40-week SMA would raise the odds of a major top already being scaled.
Until that happens, the JCI should remain on an uptrend.
5.7: Weekly chart for Indonesia’s Jakarta Composite
MACD negative divergence
6
Putting it all together
Plan your trade, trade your plan
MAs remains one of the popular technical indicators. Today, MA remains one of the most popular
technical indicators among investors and traders. We have shared with you a few MA trading strategies.
Even the simplest strategy can be very profitable. Even the most basic type of signal – using the 20-day
SMA as the single crossover – can be very profitable in a trending market. The concern is when the market is
trading sideways and the signals fail during this period. One loses capital and also “mental capital”, i.e.
confidence in a sideways market.
Weekly chart eliminates noise. In our work, we use weekly charts to identify trends, both medium term and
short term. This is because weekly charts and the weekly MACD indicator eliminate most of the “noise” in the
market and show us a clearer trend. It is not perfect but we find it one of the most useful indicators of
medium-term trends in markets.
Moving average compression can be very profitable. Moving average compression signals can be very
profitable in a trading market. This is one of our favourites. However, the only problem is that MAC signals do
not come often. When daily charts are used, an MACD signal probably happens only few times in a year.
Combine with other knowledge and discipline. One also cannot depend on moving averages alone during
trading. Studies like price patterns, candlesticks and time cycles should be of help in trading. Discipline is also
crucial to trading in the market.
I always say that you could publish my trading rules in the newspaper and no one would follow them. The key
is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we
taught our people. What they could not do is give them the confidence to stick to those rules even when
things are going bad. (Richard Dennis, quoted in Market Wizards by Jack D. Schwager)
Plan your trade, trade your plan. Before one starts trading, one needs to plan. One must answer these
questions first:
- Markets: What to buy or sell
- Position: How much to buy or sell
- Entry price: When to buy or sell
- Cut loss level : When to get out of a losing position
- Selling: When to get out of a winning position
- Strategy : How to buy or sell
Notes:
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RECOMMENDATION FRAMEWORK #1 *
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS

OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12
months.
NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is
benchmark's total return. expected to perform in line with the relevant primary market index over the next
12 months.
UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,
benchmark's total return by 5% or more over the next 12 months. is expected to underperform the relevant primary market index over the next 12
months.
TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is
benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3
months.
TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe,
benchmark's total return by 5% or more over the next 3 months. is expected to underperform the relevant primary market index over the next 3
months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be
temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
RECOMMENDATION FRAMEWORK #2 **
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS

OUTPERFORM: Expected positive total returns of 15% or more over the next OVERWEIGHT: The industry, as defined by the analyst's coverage universe,
12 months. has a high number of stocks that are expected to have total returns of +15% or
better over the next 12 months.
NEUTRAL: Expected total returns of between -15% and +15% over the next NEUTRAL: The industry, as defined by the analyst's coverage universe, has
12 months. either (i) an equal number of stocks that are expected to have total returns of
+15% (or better) or -15% (or worse), or (ii) stocks that are predominantly
expected to have total returns that will range from +15% to -15%; both over the
next 12 months.
UNDERPERFORM: Expected negative total returns of 15% or more over the UNDERWEIGHT: The industry, as defined by the analyst's coverage universe,
next 12 months. has a high number of stocks that are expected to have total returns of -15% or
worse over the next 12 months.
TRADING BUY: Expected positive total returns of 15% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe,
months. has a high number of stocks that are expected to have total returns of +15% or
better over the next 3 months.
TRADING SELL: Expected negative total returns of 15% or more over the next TRADING SELL: The industry, as defined by the analyst's coverage universe,
3 months. has a high number of stocks that are expected to have total returns of -15% or
worse over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the
prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Securities Offices
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Trading Smart With Moving Averages-080811

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KDN PP 1408/11/2011 (026862)

Trading Smart with…

Nigel Foo +6(03) 20849293 – nigel.foo@cimb.com

What is a moving average?

Why the lag?

1.1: Daily line chart for US’s Nasdaq Index

Source: Bloomberg & CIMB Research

One of the oldest and reliable indicators

2.1: Daily line chart for Dow Jones Industrial Index

Source: Bloomberg & CIMB Research

2.2: Daily line chart for Citibank

Source: Bloomberg & CIMB Research

2.5: Daily line chart for Google with 30-day SMA

3.1: Daily bar chart for crude oil price

Source: Bloomberg & CIMB Research

3.2: Daily chart for crude palm oil (RM/tonne)

Source: Bloomberg & CIMB Research

3.3: Daily chart for Indonesia’s Jakarta Composite Index

Source: Bloomberg & CIMB Research

3.4: Daily chart for South Korea’s Kospi

50-day SMA failed

Source: Bloomberg & CIMB Research

3.5: Daily chart for Goldman Sachs

Source: Bloomberg & CIMB Research

3.6: Daily chart for Thailand’s SET

3.7: Daily chart for Malaysia’s Genting

3.8: Daily chart for Malaysia’s SP Setia

Escape Mar-08 sell-off

, bearish descending triangle, support trendline

Source: Bloomberg & CIMB Research

Major sell signal !

Source: Bloomberg & CIMB Research

4.2: Daily chart for soyabean (US$/lb)

Triangle sideways formation?

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

4.5: Weekly chart for crude oil (US$/barrel)

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

Source: Bloomberg& CIMB Research

20-day SMA (low) support

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

20-day SMA (low) support

Source: Bloomberg & CIMB Research

Source: Bloomberg & CIMB Research

4.13 : Daily chart for Google

Source: Bloomberg & CIMB Research

4.14: Daily chart for Singapore’s Genting Singapore (S$)

Failed sell signal Failed sell signal

Source: Bloomberg & CIMB Research

4.15: Daily chart for Hong Kong’s Hang Seng Index

Source: Bloomberg & CIMB Research

4.16: Daily chart for S&P500

Source: Bloomberg & CIMB Research

4.17: 150-minute chart for crude oil

Failed sell signal

Source: Bloomberg & CIMB Research

4.18: 15-minute chart for gold price

Source: Bloomberg & CIMB Research

5.1: Daily chart for Dow Jones Industrial Index