THE HAnDbook of TEcHnIcAl AnAlySISThe reliability of a moving average as support and resistance depends on:■ (^) The moving average’s angle of ascent and descent
■ (^) The number of times it has been tested
■ (^) The accuracy and quality of the price test
■ (^) The amount of volatility in the market
Moving averages indicate potential bullishness and bearishness in the following
ways:
■ (^) A rising moving average is an indication of potential bullishness.
■ (^) A declining moving average is an indication of potential bearishness.
■ (^) A shorter-term moving average crossing above a longer-term moving average
is an indication of potential bullishness.
■ (^) A shorter-term moving average crossing below a longer-term moving average
is an indication of potential bearishness.
■ (^) A shorter-term moving average rebounding off a longer-term moving average
to the upside is an indication of potential bullishness.
■ (^) A shorter-term moving average rebounding off a longer-term moving average
to the downside is an indication of potential bearishness.
Moving averages are not affected by the type of chart scaling used, whether it
is semi-logarithmic or arithmetic. This is because moving averages are determined
numerically and have no geometrical component on the charts, unlike trendlines,
which are geometrically related and drawn from price inflection points on the
charts. This makes trendlines and chart patterns susceptible to inconsistencies
when employing different chart scaling.
We shall now study the components of moving averages and the various meth-
ods of constructing a moving average.
(1) the Data field
Moving averages are constructed by creating a truncated or continuous rolling
average using technical data such as:
■ (^) Price Data: Open, High, Low, and Closing Prices (OHLC)
■ (^) Volatility Data: Standard Deviation, Mean Deviation, True Range
■ (^) Transaction-Based Data: Volume, Tick Volume, Open Interest
■ (^) Market Breadth Data: Advances, Declines, Total Issues, New High, New Low,
Up Volume, Down Volume, Total Volume
■ (^) Flow of Funds Data: Margin Debt, Account/Credit Balances, Cash to Asset Ratios
■ (^) Sentiment Data: Short Interest Ratio, Specialist to Public Ratio, Bullish Percent
Index, Put/Call Ratio, Implied Volatilities (VIX), Bond Yields (Yield Curve),
Net Commercial and Net Noncommercial Positions (COT Report)
A truncated moving average is one where data is averaged over a fixed number
of data points, dropping off older data points with the addition of more new data,