The Key to Trend Analysis

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As I mentioned in my last article, the difference between the 18 moving average and the 20 moving average is very small.  I believe the techniques described on this website and in my videos can be employed by any intermediate term moving average line 18 to 22 periods in length.  If you prefer to use a 20 MA instead of 18 MA, that is fine.  However, stick with it.  Please do not switch back and forth.  Your mind will learn to assimilate to whichever MA lines you choose.  But, if you continue to switch the lines, your subconscious mind will never be of service.  I know from my own experience after using the same MA lines in viewing millions of charts over the years that there are times where I know what is coming (an intuitive feeling) but I have a difficult time explaining it to my clients in the form of hard facts.  This is the subconscious mind taking over and it can be a powerful tool in chart reading.  It will only work after your mind has processed thousands and thousands of charts which have the same look to them. 

Whichever length you choose, this intermediate term moving average is the most important component in this strategy.  While I use the 18 MA and the 40 MA as a buddy system, it is the 18 MA which really drives this approach.  The position of the 18 MA on the monthly chart will play a large role in defining your longer-term investment strategy for a given instrument.  It has the same effect as the wind blowing at your back when riding a bike.  If you have ever tried to ride a bike on open road with the wind in your face, this will give you the sensation of what it is like to make a long-term investment when the 18-month MA is working against you, i.e. bad weakness. There are very few exceptions to this rule.  The monthly chart of Amazon (AMZN) below shows what can take place when the 18-month MA line is working for you.  This line has been rising since 2009 except for a pause in 2014 where it flattened but never turned down.  As long as this MA has good upward slope, the long-term trend is bullish with good momentum.  The slope of this line is important to monitor.  I have bolded the line on the next few charts to show that the 18 MA on each timeframe is the driver for this approach and quite often will be the same as the trendline if it were drawn in.  Also, it tends to

provide support on pullbacks when it is rising and offers resistance on rallies when it is declining.  It is a moving line so it is an area of support/resistance as opposed to an exact level. The monthly chart of Walmart (WMT) is a good example of how the slope of the 18 MA helps to provide a bias for the long-term trend.  Since we are using an 18-month MA, it is considered the long-term trend.  An 18-week MA would be considered the intermediate-term trend.  The first shading on the WMT chart shows a flat period for this MA line and that puts the bigger picture trend in the neutral camp until the breakout in early 2012.  Then, in late 2014, a sharp selloff turned the 18-month MA lower.  There was no

confirming price evidence of a change in trend (explained in the 1-2-3 Change in Trend article). The decline reversed back to the upside after spending significant time shifting the slope of the 18-month MA line back up in early 2017 (second shaded area).  The act of turning this monthly line is time consuming and often provides plenty of time to monitor while this process takes place.  In this example, it took nearly a year to turn from the point that rallied up to it for the first time in 2016. Note that when this line turned higher, it became nice support on two deep pullbacks during 2018.

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