The Tycoon Report

SKIPPING THE LANDMINES AND DODGING THE BULLETS: Psst… how’d you like to make an extra 18½% a year on your money?

One of the most powerful technical tools we use to gauge strength or weakness in a particular stock or index is where it is trading in relation to its moving average. Moving averages are just an average of successive price data over a specified period of time.

They are very useful in “smoothing” out the price patterns on charts and are an excellent guide in identifying trends and trend reversals.

For us, the most useful is the 200-day moving average.

In fact, in a study conducted by William Gordon, he demonstrated that by buying and selling the Dow Jones Industrials stocks between 1917 and 1967 using only the 200-day moving average, an investor could have realized an average yearly simple return of 18.5%.

Let me put that in perspective for you.

Warren Buffet, arguably the greatest investor of all time, has an average compounded rate of return of 22½%!

Now, while we don’t recommend basing your entire investment strategy on the historical strength of one technical indicator, here are the two rules that Gordon used in the study to determine buy and sell signals from the moving average (excerpt taken from The Stock Market Indicators by William Gordon):

1.     If the 200-day moving line average flattens out following a previous decline or is advancing and prices penetrate the moving average line on the upside, this comprises a major buying signal.

2.     If the 200-day moving average flattens out following a previous rise or is declining, and prices penetrate the moving average line on the downside, this comprises a major sell signal.

Take a look at the charts of stocks you own and historical charts on NASDAQ and the NYSE and, while not infallible, you will be blown away by how accurate this indicator can be.