For nearly 30 years, VantagePoint Intermarket Analysis software has been helping Traders forecast Market trends over 2, 4 and 10 day periods. This unique Trading Tool can help you determine when to get in and when to get out -- profitably and reliably -- as part of your unique, disciplined Trading Strategy. Go here to learn our VantagePoint can help you to become a more successful trader.

Even with all of the sophisticated technical indicators that have been developed for individual traders since the introduction of the personal computer about 25 years ago, moving averages are still one of the most popular and widely-used indicators to help identify market trends.

With their computation made simple and quick by the computer, various forms of moving averages are the basis of numerous trading strategies, from crossover techniques to combinations of triple moving averages to the 50-day or 200-day moving averages that are considered standards in determining longer-term trend direction. Moving averages are, after all, an objective way to use actual price data to smooth out fluctuations in price movement and reduce some of the noise that seems to permeate active markets.

There is a problem . . .

But for all the value they can provide in analyzing price action to determine the overall trend of a market, traditional moving averages do have one serious deficiency: Because they are based on prices that have already occurred in the past, they are a '"lagging" technical indicator. By averaging prices over a number of prior periods, you get a good picture of past price movement but not necessarily a good view of expected price movement in the future. Consequently, traders who rely on traditional moving average signals may be late in getting into or out of positions at market turns, and their accounts may suffer in today’s fast-moving global markets.

A typical moving average strategy involves trading the crossover of a shorter-term moving average above or below a longer-term moving average. For example, when a 5-day moving average, which is more responsive to current price action, crosses above a 10-day moving average, which changes more slowly, you have a buy signal based on the premise that the movement in prices is up and that, once such a trend is in motion, it is likely to stay in motion. As long as the shorter moving average is above the longer moving average, you remain long until the shorter moving average penetrates below the longer moving average.

In strongly trending markets, these traditional moving average crossover strategies can be quite effective in identifying the current market direction. However, during those non-trending, choppy periods -- or even in erratic trending markets when a moving average may be too short for the conditions -- typical moving average strategies may not be able to cope with abrupt price fluctuations, resulting in misguided trading signals and whipsaws. You only have to look at some of the daily or intraday price swings in some markets recently to see how disastrous that might be for your trading.

Even with advances in technology and more complex strategies available to a wider range of traders, the lag effect continues to be a key defect of traditional moving average strategies in today’s fast-moving global financial markets. If there would only be some way to eliminate or reduce this lag while still retaining the smoothing benefits of moving averages  . . .

Bringing in intermarket data

One of the main purposes of technical analysis is to identify the current market trend and forecast what that trend will be in the future. That is the basis for making profitable trading decisions. For years traders have relied on only single-market data to compute trend-following moving averages and other technical indicators. And for years an estimated 80% of traders or more have been losing money, a situation that hasn’t changed since the pre-computer days. If you are using the same data and the same techniques as everyone else, the chances are pretty good that you will be among those losing money, too.

One innovative solution to this dilemma involves transforming moving averages into a leading indicator by using both single-market and intermarket price, volume and open interest data as inputs into the design of neural networks, which are then trained to make short-term forecasts of moving averages. Neural networks, based on mathematical artificial intelligence techniques, can be trained to find reoccurring patterns and relationships within both single-market and intermarket data that can be applied to market forecasting. These forecasted moving averages are then incorporated into predictive moving average crossover strategies that identify market trend direction of individual financial markets with high accuracy.

In other words, you can still use techniques and strategies with which you may already be familiar but with a different set of data based on intermarket analysis to get an early clue about changes in the direction of prices for your target market.

In today’s interconnected global marketplace, where the value of the U.S. dollar affects the price of crude oil which affects the price of corn which affects the price of soybeans and on and on, traders must have an intermarket perspective and incorporate intermarket data into their current trading strategies. By analyzing the impact markets have on one another and quantifying these relationships, traders will be able to develop effective leading indicators that correspond to current market conditions.

Of course, it will never be possible to create any indicator that will never have any lag and will be able to forecast future market direction with 100% accuracy. But if you can achieve 80%-85% predictive accuracy and can get an indication of trend changes a day or several days ahead of a traditional moving average, you should be able to do rather well as a trader.

Looking at today’s markets

So what do predictive moving averages suggest about current markets? Predicted moving averages can be used a number of ways, but we’ll concentrate on just one widely used strategy, a moving average crossover, in several markets. On each chart below, the black line is a 10-day medium-term simple moving average of actual prices, and the blue line is a predicted medium-term exponential moving average using forecasts based on intermarket data. Note that the predicted moving average line tends to turn several days before the actual moving average. That doesn’t assure a perfect trading signal that works every time, but it can give traders a valuable edge in a competitive market.

If you cannot view the Crude Oil chart, go here.
Source: VantagePoint Intermarket Analysis Software

You hardly need a chart or a moving average or any other indicator to know that prices for crude oil, gold and several other commodities have been in strong upward trends. As the crude oil chart above shows, the initial crossover of the predicted moving average above the actual moving in August indicated a long position around $72 a barrel. A waffling market in early October suggested moving out of the long position, but another crossover of the predicted moving average to the upside in mid-October indicated another long position around $82.

With the plunge in crude oil, gold and forex prices Monday, there are clear signs that oil prices might be ready to roll over short of the psychological $100 barrier. Although the moving average alignment still indicates a long position, a followthrough downside crossover would confirm the indication for a change in trend and a shift to short positions.

Note, however, that the moving average can be read another way. Like other support/resistance boundaries such as trend lines, previous highs or lows, pivot points, etc., moving averages can be another support or resistance point. Prices in any market can only do one of two things: Break through a support/resistance area to start a new trend (perhaps sideways) or back off from support/resistance to respect that area and continue the trend in place.

When crude oil prices moved back to the moving average line several previous times in October, it provided a location for a brave aggressive bullish trader to initiate or add to a long position in the vicinity of the moving average level, assuming the moving average support line would be respected and the price advance would continue. That is the same situation the market was in after dropping back to the trend line again Friday (except at a higher -- and riskier? -- level). A more conservative approach would wait for and then go with the crossover indication.

If you cannot view the Canadian dollar chart, go here.
Source: VantagePoint Intermarket Analysis Software

The situation in Canadian dollar futures is somewhat the same as in crude oil except that the predicted moving average did crash through the actual moving average Monday and the candlestick topping pattern looked much more ominous for the bulls. With the crossover to the downside and a solid move below 1.06, it looks like the long Canadian dollar run that goes back to about 94 cents last August is over. The challenge following sharp drops like this is finding a low-risk place to go short.

If you cannot view the Soybean chart, go here.
Source: VantagePoint Intermarket Analysis Software

The continuous soybean futures chart also remains on an upward run after several challenging periods -- it’s hard to have a one-way move in any market, no matter how strong the apparent trend. Despite being in a normally bearish harvest period and fundamental analysts saying the runup above $10 a bushel is overextended, the predicted moving average indicates a long position is still the place to be in soybeans.

If you cannot view the Wheat chart, go here.
Source: VantagePoint Intermarket Analysis Software

The situation on the continuous wheat futures chart above shows an opposite condition from soybeans. After a runup of more than $2 a bushel from mid-August, the predicted medium-term moving average turned lower three days before the actual medium-term moving average turned down in early October and indicates an ongoing downtrend following the moving average crossover around the $8.80 level.

If you cannot view the E-mini S&P 500 chart, go here.
Source: VantagePoint Intermarket Analysis Software

As anyone who has traded stock indexes is well aware, some wide-swinging days have made for some challenging trading experiences in the E-mini S&P 500 Index for any trading approach in the last few months, calling for shorter-term trades and the use of profit targets to preserve profits when they are available. Longer-term, the indicated position is down since the predicted moving average crossover in the 1520 area in early November.

For nearly 30 years, VantagePoint Intermarket Analysis software has been helping Traders forecast Market trends over 2, 4 and 10 day periods. This unique Trading Tool can help you determine when to get in and when to get out -- profitably and reliably -- as part of your unique, disciplined Trading Strategy. Go here to learn our VantagePoint can help you to become a more successful trader.