The Moving Average Point & Figure relationship
To begin, moving averages cannot be plotted on a Point & Figure chart! This is due to time on a P&F chart not being constant. However, a key moving average value provides supporting evidence to Point & Figure chart analysis. Consequently, a good analyst always consults their respective values.
For instance, should a P&F chart produce a bullish reversal pattern at a given level. Level coincides with a key moving average support test. Greater confidence is thereby achieved in the likelihood of a P&F signal succeeding.
What moving average values are best used with Point & Figure chart analysis?
Point & Figure end-of-day charts, as utilized for medium to long-term investing purposes, are well complemented by the 10 week moving average and 30 week moving average.
These weekly moving averages are smoother than a daily moving average and also fit the slow pace of Point and Figure box movement. For instance, a 3 box reversal, necessary to reverse column direction, typically takes days to print.
Traditionally, Chartcraft of New York, Point & Figure pioneers, favored application of the 10-wk MA and 30-wk MA.
Where to source the weekly moving average values?
Our Point & Figure charting tool displays the values of the 10 week and 30 week moving average. Beneath each chart, in the key data table, to the lower right corner. We provide a free, no obligation, five day trial to the tool. Utilizing the user friendly tool enables fast investment idea generation.
10-week moving average
Suited for traders, the 10-week moving average is a short-term average of the price, over ten weeks. Values are of immense use to their respective P&F charts. Furthermore, values make a vital contribution to an important moving average breadth indicator.
NYSE % 10-week Moving Average Breadth Indicator
At any point in time, each member of the broad NYSE market, will either be trading above, or beneath, their 10-week moving average. Therefore, it is fairly straightforward to determine how many members of the NYSE are trading above their moving average. That number may then be simply converted into a percentage of constituents above the average. That percentage provides a breadth moving average indicator, the NYSE % 10-week moving average.
This moving average breadth indicator is typically plotted on a P&F chart. The chart provides a gauge of market health. Beneath 30%, the market is oversold. Above 70%, the market is overbought. Internal expansion, a healthy process, would appear as a rising trend on the NYSE % 10-week moving average. Alternatively, an unhealthy internal contraction, will form a falling trend on this indicator chart. The indicator may also be found on our charting tool; as per screenshot below, free trial available.
30-week Moving Average
The 30-week moving average is a long-term average of the price, over thirty weeks. Great tool for investing purposes given its lengthy duration. As with the 10 week moving average, values for each NYSE member all contribute towards a moving average breadth indicator.
NYSE % 30-week Moving Average Breadth Indicator
The % 30-wk moving average indicator is similar to the % 10-wk moving average explained above, except slower moving, since it utilizes a longer term average. Consequently, the indicator favors long-term investing.
The indicator behaves in much the same way as the shorter term indicator. When the Point & Figure moving average indicator trades beneath 30%, the market is considered oversold. Alternatively, trading above 70%, the NYSE is overbought at the medium-term level. Likewise, improving internals would manifest as a rising trend on the NYSE % 30-week P&F moving average. Whereas, an unhealthy internal deterioration, such as that during a bear market, forms a falling trend.
Moving Average Investing
The moving average is a valuable tool in the investor's arsenal. Their effectiveness is enhanced when used alongside the Point & Figure chart. Below we touch on a few key pointers with regards their application.
Analyzing price action at a moving average
A moving average value alone is little use. What is important, is how trading reacts at the average, that benefits moving average investing.
- Trading above a moving average is generally bullish.
- Price action beneath an average is typically bearish.
- A pull-back to a rising moving average, and recovery, often confirms completion of a correction during a bull market. The price is said to have found moving average support.
- Alternatively, a rally into a falling moving average, and reversal signature back down, would suggest completion of an oversold bounce during a bear trend.
When is a moving average most effective?
During a trending bull or bear market. Such periods are identifiable by price action following, and adhering to, a channel. It is during these periods that stocks, and indexes, follow tidy trends. As a result, the moving average provides reliable guidance, a road-map.
When should a moving average not be used?
During a range-bound market, spanning weeks to months. A moving average is of little use in a sideways market since price action merely whip-saws across the average. The moving average trades flat during these periods, with volatile moves across the average, offering poor trend guidance.
Lastly, moving average tests are never perfect!
It would be too easy if moving average visits were limited to a kiss and reversal. Expect volatility in and around moving averages as bulls and bears battle it out for supremacy. False turns, failed breakdowns or upside breaks, through moving averages, are commonplace. To trade moving average tests effectively, bear in mind that the market will try its best to confound the majority! Consequently, use the Point & Figure charts for directional clues, such as reversal patterns coinciding with the moving average test. For example, a Low Pole, breaking down through a moving average, with the price then sharply recovering back above the average. Such action would be a great moving average investing signal.
Moving Average P&F Case Study
In September 2019 Boston Beer retreated off its record high. The pull-back reverted as far as 30-week moving average support. Following the price visit to the moving average, a bullish breakout printed, indicating the correction had tired. Subsequently, the price recovered back towards $400 in October 2019. As of December 2019, the price has eased back to $370.