The document discusses using simple moving averages (SMAs) as a leading rather than lagging indicator. It argues that SMAs can help identify support and resistance levels when used with techniques like point and figure charting to reduce noise. The document provides examples showing how SMAs of different time periods overlaid on a chart, along with other indicators like Bollinger Bands, can help traders analyze trends and potential entry and exit points.

1. Using Simple Moving Averages as a
Leading, not lagging, Indicator
www.bluechipoptions.com
Chip Evans, PH.D.

2. Using Simple Moving Averages as a Leading, not
lagging, Indicator
1
Moving averages do not predict a price direction, but according to
www.stockcharts.com “define the current direction, with a lag”, and “smooth the
price data to form a trend following indicator”.
Most believe moving averages “lag” as they are based on past prices.
In my work at www.bluechipoptions.com, our 7 year in a row Reader’s Choice
award winning option advisory service1 we use moving averages as a “leading
indicator working with Bollinger Bands on point and figure charts to help to analyze
not what was, but to “eliminate noise” to see the prior trend, and what happened.
Many traders use the simple moving average (SMA) or exponential moving average
(EMA) to identify the direction of trend and to see support/resistance and pivot
points.
A moving average is based on number of days; a 10-day SMA is the sum of closing
prices of the stock or option (yes, it works on cash derivative options on the DIA,
SPY, SPX and OEX very well) divided by the number of days. The average “moves
along the time scale”.
Chart schools teach the SMA as lagging because it is using “past data”, and because it
“drops” the first data point as a new 10 day average (or whatever the time period
chosen) each day. Exponential moving averages (EMA) apply more weight to the
most recent data by calculating the SMA, creating a weighting multiplier, and
creating the EMA. Formulas for this methodology are easy to find in all online
charting schools.
It’s much simpler than we make it, and much more predictive when viewing either
an EMA or SMA using Point and Figure charting.
Point and figure charting eliminates “all noise” and www.bluechipoptions.com we
use a variety of ratios and time periods to see “very little so we see much more”.
Here’s an example:
1 Stocks and Commodities Magazine 2008-2014

3. Using Simple Moving Averages as a Leading, not
lagging, Indicator
2
This chart of the Dow is:
-daily (using data from 3/2/15)
-uses a 3:1 ratio on the movement to cut out clutter
-shows upper and lower Bollinger Bands
-uses a 20 day Average True Range (ATR)
-uses a 20 day SMA
From this chart 17, 050 hits the lower Bollinger Bands, and 17,800 the higher
Bollinger bands, and 17, 450 as the SMA. The top shows at 18,253, which to our
eyes shows an overbought market far over the Bollinger Bands, far above the
moving average, and having surpassed a “double top breakout” on February 13,
2015.

4. Using Simple Moving Averages as a Leading, not
lagging, Indicator
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Now, view the same chart with a few changes:
This chart of the Dow is also daily, but changes variables:
-ATR vs. Traditional
-Box size .50 vs. the norm of 1.0
-Reversal at 2.0 vs. the norm of 3.0
-SMA of 10 days
Now we are with a new top/bottom of Bollinger bands, a new lower support line at
17, 383, which is also the SMA. Option traders for the Dow, using the DIA, well see
support and resistance lines (inverse) at 17, 894, 17,722, 17, 553, and at the SMA.
As the market when this is written is at new highs, no new resistance lines exist, nor
any Bollinger Band.

5. Using Simple Moving Averages as a Leading, not
lagging, Indicator
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Using Fibonacci (http://www.ask.com/wiki/Fibonacci_retracement?lang=en)
Retracement we use our version of “magic numbers” that seem to hold support and
resistance lines, and fit with numbers, no matter what 000’s they are with (5000,
1,6000,00, 18,000 as examples). 747-827 always appear to be “support or
resistance” in all cash derivative options, and in all stock ranges. I find many other
sequences like these because of point and figure charting. 2 Schooled in this Charles
Dow manual count and no noises simplicity of PnF charting, it’s easy to see more
clear to see why the simplicity of the market is its' greatest disguise©
While writing this article I consulted with a number of stock traders and
economists, and gathered ideas of how others use SMA.
“Suggestion: plot a 5-period SMA of 1-day S&P500 ATR, and watch what happens
when the ATR tilts below 10, or pops over 40”3
2 http://en.wikipedia.org/wiki/Point_and_figure_chart
3 Tom McInnis, Economist
-350
-300
-250
-200
-150
-100
-50
0
50
100
150
200
250
300
350
400
450
Daily Movements & Fibonacci Numbers
Movement
173
178
177
1754
7.51
1695
0.93
1674
6.09
1624
7.22

6. Using Simple Moving Averages as a Leading, not
lagging, Indicator
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Here’s how such a chart looks, two ways:
1. Using Point and Figure charts:

7. Using Simple Moving Averages as a Leading, not
lagging, Indicator
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2. Using a Candlestick chart showing Bollinger Bands, RSI, and MACD, with a 5
day SMA, using the suggestions above:

8. Using Simple Moving Averages as a Leading, not
lagging, Indicator
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Another trader creates up to 3 SMA on a graph. He says, “The data is at least a day
old unless the market is closed. It does give you a choice on the moving averages,
which might change on your time horizons. I use 5, 13 and 21 day moving averages
most often, but it also will allow you to enter the first desired and then double it,
then double that again. You can also choose to use or not use 1 to 3 averages.”4
Simple moving averages can be used simply. I believe that creating flows of daily,
weekly, and to the hour PnF charts, using Average True Range (ATR), and Bollinger
Bands, helps eliminate noise allows the SMA to smooth the trader’s noise of viewing
too much information.
In a Nutshell:
 “The basic function of moving averages is to raise the contribution (weights)
of old data at the cost of the distribution (weights) of the younger data”. 5
 A Simple Moving Average may be better suited to identify support and
resistance lines, and use of the SMA is a confirmation of these lines.
 Longer moving averages show more of the lagging of the indicator. A 10-day
simple or exponential moving average will turn only after prices turn. Use of
shorter SMA’s, or overlays of different time periods, may prove more
valuable for option and/or momentum stock trading.
 A simple moving average used in overlay of a number of different “days
counted” can create a moving –average crossover, as by smoothing the traces
of these moving averages cross, and show trends.
 Faster moving averages (5, 10, 25 day) show the short term trend, while 50,
100, 200 day averages show cycles, and smooth out price “noises” more
effectively.
 If one uses both a short and longer term SMA using a Point and Figure (PnF)
chart, or an O/H/L/C bar chart the overlay where the shorter term crosses
the longer term is often a meeting point to enter or exit the market.
Chip Evans, Ph.D. is the President of The Evans Group LLC, a business consultant
company - www.theevansgroupllc.com and the 7 year award winning stock and
option educational and trading service/system www.bluechipoptions.com
4 David Lanman- Accounting, Analysis & Excel Expert
5 Stocks and Commodities Magazine March 2015 issue