Using Moving Averages to Find Winning Stocks

Today I want to talk about moving averages.

I wrote about this earlier in the year, but thought a quick review would be in order since so many people are talking about the 200-day moving average on TV and in the newspapers, and whether the stock market can get thru it or not.

First off, moving averages would fall under the heading of 'technical analysis'. But you don't have to be a technician to use them. They're pretty plain and simple and very straight forward.

Even though the market is making a nice comeback, it has been in a brutal downtrend over the last year and a half.

But we're at an inflection point where the market seems to be getting ready to breakout even higher - or hit a wall and turn around.

And that's where all of this 200-day moving average talk comes into play.

Long-Term and Short-Term Moving Averages

Short-term moving averages help gauge the short term direction of the market while longer-term moving averages take a bigger picture view.

The 200-day moving average would be a longer-term moving average.

In general, if a stock breaks the 200-day moving average on its way down, that's generally thought to be bearish, and the longer-term trend could be turning lower.

Tons of stocks did this in 2008.

The 200-day moving average can also act as support. If a stock comes down, but stops at the major moving average and then starts moving higher from there, it can act as a firm underpinning of support for the stock. Kind of like a moving trendline.

And just like breaking the 200-day moving average on the way down can often times signal a downtrend, an upside breakout thru the 200-day moving average can often times signal the beginning of a new uptrend for a stock.

The 50-day moving average can be quite useful as well. It's more of an intermediate snapshot of the price trend and is more sensitive than the longer-term 200 day.

A rising moving average with the price trading above it is bullish while a descending moving average with the price trading below it is bearish.

And even shorter term signals can be seen with the 10- and 20-day moving averages.

Moving average crossovers can also be valuable. When the quicker moving average (10-day for example) is above the slower moving average (20-day), this is thought to be bullish. Likewise, when the shorter-term is trading below the longer-term moving average, this is thought to be bearish.

Currently, the Nasdaq is trading above the 200-day moving average, the S&P 500 just poked thru there the other day and the Dow Jones just touched the underside of it on Monday. (See below.)

What does this mean?

It means that the market will be looking at the indexes very closely to see if the 200-day moving average acts as resistance or support.

If the markets can stay above the 200-day; chartists, technicians, skeptics and the like will look at this as the confirmation they need to believe the market is shedding its long-term downtrend and potentially beginning a new leg up.

But whether the market breaks thru the 200-day moving average or not, there are plenty of stocks already trading above it and many more breaking thru (up or down) every day.

And finding these kinds of stocks is easy to do with a stock screener.

Of course, moving averages alone don't tell the whole story. But a company with solid fundamentals, while also trading above these momentum indicators, can help you find stocks in confirmed uptrends.

The screen that I'm running today looks for stocks trading above their short-term moving averages (10- and 20-day), intermediate term moving average (50-day) and long-term moving average (200-day). They also have to have a Zacks #1 Rank or Zacks #2 Rank stocks (which is a Strong Buy or a Buy, respectively) and have positive forward looking growth rates.

Here are 5 stocks from this week’s screen:

EQIX - Analyst Report Equinix, Inc.
EVVV - Analyst Report ev3, Inc.
MRTN - Snapshot Report Marten Transport, Inc.
PCLN - Analyst Report priceline.com, Inc.
URS - Snapshot Report URS Corp.

Get the rest of the stocks on this list and start finding stocks above (or below) their moving averages on your own. It’s easy to do.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.