How to Trade Bullish Crossovers

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Sep 12th, 2012 | By | Category: Investor Education, Trend Playbook

Moving averages can tell you much more than just the direction of a particular stock’s trend.

If you add multiple moving averages to your charts, you can even use them to generate buy and sell signals.

Today, I want to help you find stocks that could be on the verge of making a big move by searching for bullish moving average crossovers.
I’ll explain just how these crossovers work in just a second. But before I do, I want to thank you for all of the comments and questions you have submitted. For the past few weeks, I’ve been building screens to help you find potentially profitable trades. Your response has been overwhelming. So I’m going to continue sharing my scan ideas with you every week.  My hope is that you will experiment with my screening metrics and add a few new weapons to your trading arsenal.

[Editor’s note: If you have a question about any of my screens—or if you have a specific set-up you’d like to see me review—contact me at trendplaybook@agorafinancial.com. I’ll do my best to answer your questions in the next installment.]

Now, back to how these moving average crossovers work. Take a look at the following chart:

The blue line is the stock’s 50-day moving average. The red line is the 200-day moving average. When looking for a bullish moving average crossover, you want to see the rising, shorter-term moving average cross above the longer-term moving average. In this example, the bullish moving average is marked with a blue arrow. That’s your buy signal for a longer-term trade.

It’s important note that not all moving average crossovers are bullish. You want to have the faster moving average cross from below to above the slower moving average. A break below a slower moving average is bearish (I’ve marked an example on our chart with the red arrow).

Let’s put this idea to work in a new stock scan…

To help you follow along, I’ll be using the Financial Visualizations site Finviz.com. Feel free to use the stock screener of your choice once you’re comfortable with the process. If you’re just getting started, it will be easier to follow along with me if we’re on the same site. If you need a refresher on my basic screening criteria, read this post where I reveal my 3-minute scan breakdown.

For this new scan, we’re going to begin just like we always do. Go to Finviz and select “Screener” from the top menu bar. This will take you to the main stock screen page.

To get started, you need to eliminate the stocks you don’t want to trade. These are the low-volume and potentially volatile stocks that can trap you in a losing position.

Under the main “Descriptive” tab in the screener, you should select stocks with average trading volume of more than 100,000 shares. This will weed out all of those low-volume stocks you’ll want to avoid.

Finviz already narrows your search to stocks trading on major U.S. exchanges. You can also limit the search to stocks within a certain price range. For this screen, I want to only look for stocks trading for more than $1:

Of course, you can set the price filter to any number that works for you. You might want to only search for stocks that trade for $5 or more. Or maybe you’re looking for stocks that trade for less than $30. It’s completely up to your individual preference.

Now you’re ready to add the moving average crossovers. Go to the “Technical” tab and find the “50-Day Simple Moving Average” box. Select “SMA 50 crossed SMA 200 above” and the screener will pull up recent bullish crossovers. This should pull up more than 100 stocks for you to inspect.

If you’re looking for a shorter-term trade, you can simply use faster moving averages. Find the “20-Day Simple Moving Average” box and elect “SMA 20 crossed SMA 50 above”. If you’re looking to make a shorter-term trade, this will provide you with the best results.

Of course, every stock on the scan probably won’t pass your eye test. Be picky and look for important support and resistance levels before you trade.

Sincerely,

Greg Guenthner, CMT

Questions or comments? Drop us a line at trendplaybook@agorafinancial.com.


Author Image for Greg Guenthner

Greg Guenthner

Greg Guenthner, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes. He is also the editor of Agora Financial’s Trend Playbook, a free resource for trend followers and technical traders. For close to a decade, Greg has led Agora Financial’s small-cap division, where he founded one of one of the only independent OTC research advisories in the industry. Greg specializes is classical trading techniques and combines timing strategies with his fundamental analysis of small-cap stocks.

He is a member of the Market Technicians Association and hold the Chartered Market Technician designation. 

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