when to buy and sell stocks - using the charts and moving average (Fidelity)

Trading in motion with moving averages

Unleash this simple yet powerful tool to unlock a wealth of information within your charts.

• FIDELITY VIEWPOINTS 
• – 11/24/2015

Among all the technical analysis tools at your disposal—MACD, Relative Strength Index, Dow theory, point and figure charting, Japanese candlesticks, calendar theories, and more—moving averages are one of the simplest to understand and use in your strategy. Yet they are also one of the most significant indicators of market trends, being particularly useful in upward (or downward) trending markets—like we have been experiencing since 2009.

Here’s how you can incorporate moving averages to potentially enhance your trading proficiency.

What are moving averages?

A mean is simply the average of a set of numbers. A moving average is essentially a mean; it’s a “moving” average because as new prices are made, the older data is dropped and the newest data replaces it.

A stock’s normal movements can be volatile, gyrating up or down, making it a little difficult to assess its general direction. The primary purpose of moving averages is to smooth out the data you’re reviewing to help get a clearer sense of the trend (see the chart below).

A moving average smooths out the price.

Source: FactSet, as of November 16, 2015.

There are a few different types of moving averages that investors commonly use.

• Simple moving average (SMA). An SMA is calculated by adding all the data for a specific time period and dividing the total by the number of days. If XYZ stock closed at 30, 31, 30, 29, and 30 over the last five days, the 5-day simple moving average would be 30.
• Exponential moving average (EMA). Also known as a weighted moving average, an EMA assigns greater weight to the most recent data. Many traders prefer using EMAs to place more emphasis on the most recent developments.
• Centered moving average. Also known as a triangular moving average, a centered moving average takes price and time into account by placing the most weight in the middle of the series. This is the least commonly used type of moving average.

Moving averages can be implemented on all types of price charts (i.e., line, bar, and candlestick) as well as on point and figure charts. They are also an important component of other indicators—such as Bollinger Bands®.

Setting up moving averages

You can choose between many moving average indicators, including a simple or an exponential moving average. You can choose the length of time for the moving average. A commonly used setting is to apply a 50-day simple moving average and a 200-day simple moving average to a price chart.

How are moving averages used?

Moving averages with different time frames can provide a variety of information. A longer moving average (such as a 200-day EMA) can serve as a valuable smoothing device when you are trying to assess long-term trends.

A shorter moving average, such as a 50-day moving average, will quite obviously more closely follow the price action, and therefore is frequently used to generate short-term trade signals. The short moving average can serve as a support and resistance indicator, and is frequently used as a short-term price target or key level.

How exactly do moving averages generate trading signals? Moving averages are widely recognized by many traders as potential indicators of future price levels. If the price is above a moving average, it can serve as a strong support level—meaning if the stock does decline, the price might have a more difficult time falling below the moving average price level. Alternatively, if the price is below a moving average, it can serve as a strong resistance level—meaning if the stock were to increase, the price might struggle to rise above the moving average.

The golden cross and the death cross

Two moving averages can also be used in conjunction to generate a powerful “crossover” trading signal. The crossover method involves buying or selling when a shorter moving average crosses a longer moving average.

A buy signal is generated when a fast moving average crosses above a slow moving average. For example, the “golden cross” occurs when a moving average, like the 50-day EMA, crosses above a 200-day moving average. This signal can be generated on an individual stock or on a broad market index, like the S&P 500.

Alternatively, a sell signal is generated when a fast moving average crosses below a slow moving average. This “death cross” would occur if a 50-day moving average, for example, crossed below a 200-day moving average.

Moving averages in action and a few final tips 

As a general rule, recall that moving averages are typically most useful when used during uptrends or downtrends, and are usually least useful when used in sideways markets. Generally speaking, stocks have been in a staircase-like uptrend for most of the nearly seven year bull rally, so theory suggests that moving averages can be particularly powerful tools in the current market environment.

Looking again at the S&P 500 chart (above), you can see that the long-term trend is up. Also, the price is slightly above the short-term moving average and well above the long-term moving average. If the price were to decline from the current level, both moving averages would be seen as significant support levels.

The next possible crossover signal would be the fast moving average crossing below the slow moving average (a death cross). Note that the last crossover for the S&P 500 was a bullish golden cross back in 2012. Since that golden cross signal, the S&P 500 has risen from about 1,240 to, currently, around 2,100—not too shabby for a simple moving average crossover signal.

Lump Sum vs Pension - what is right for you? (Bloomberg)

You've Been Offered a Ton of Money. Should You Take It?

If a former employer tempts you with a lump sum for your pension, consider these four points before you jump.
 Suzanne Woolley
 WealthWatch
October 22, 2015 — 7:00 AM EDT

It's like the famous marshmallow tests done at Stanford University decades ago, when researchers gave some kids marshmallows and told them if they waited 15 minutes to eat them they'd get a second one.  The kids who delayed gratification went on to have better lives, judged by a variety of measures, than the kids who didn't.  
When it comes to your pension, you are the kid. The marshmallow is a big chunk of money.
The test: Within 30 to 90 days, choose to take your pension all at once, as a lump sum based on the present value of your future pension benefit, or wait and have the money trickle in on a monthly basis over the course of your retirement.
If you're lucky enough to have been in a traditional, defined-benefit pension plan at some point, it's a choice you may have to make in the next couple of months.
Before 2012, when legislative changes  made offering lump sums more attractive to companies, the offers weren't common. Activity revved up in 2013 and 2014, and there's been a dramatic uptick this year, said Matt McDaniel, who leads Mercer’s U.S. defined-benefits risk practice. The end of the year tends to be particularly busy, he said, with offers going out on Nov. 1 or Dec. 1.

Employers have a big financial motivation to offer lump sums. Pension costs are rising as workers live longer, and companies would love to get those long-term liabilities off their balance sheets. They'd also like to stop paying rising amounts to the Pension Benefit Guaranty Corp. (PBGC), a federal agency that functions as a backstop for pensions at insolvent companies. Since 2007, the PBGC's per-person flat premiums for single-employer pension plans have risen from $31 to $57. In 2016, they'll be $64.

The argument for accepting a lump sum offer is much, much weaker. As the General Accounting Office put it in a report issued in January, "participants potentially face a reduction in their retirement assets when they accept a lump sum offer." Yet about 40 to 60 percent of those offered lump sums take them, said McDaniel.

That may be because they don't have enough information to make a good decision. The GAO report notes that the 11 information packets from plan sponsors to plan participants it reviewed "consistently lacked key information needed to make an informed decision or were otherwise unclear."
Should you accept a lump sum offer? It depends on:

Your health 
If your close relatives tend to live into their hundreds, the lifetime annuity that a defined benefit pension plan provides is extremely valuable. If you have significant health problems, smoke, and close relatives died or had serious health problems fairly young, the benefit may not be as valuable. Statistically. To be frank.
The Social Security Administration's life expectancy calculator provides a longevity benchmark. It shows a life span of 84.4 for a man who is 65 today; for women it's 86.7. For a more nuanced estimate, David Littell, director of the retirement income planning program at the nonprofit American College of Financial Services, likes www.livingto100.com. (Helpful hint: Have your cholesterol numbers handy.)
Your alternatives
If you're tempted to take the lump sum and buy an annuity on your own, think twice. For starters, you won't get the lower institutional pricing your plan gets. And if you're a woman, you'll pay a higher price, because in your defined-benefit plan annuity pricing must be gender-neutral; outside of the plans, women pay more for annuities, because they live longer. (That same logic means women pay less for life insurance.) Then there's the task of vetting an annuity provider.
The best way to determine the value of a lump sum offer is to compare it with a commercially available product. You'll probably find that the lump sum isn't enough to buy an annuity outside of the pension plan that provides the same monthly benefit,  Littell said, particularly if your plan offers cost-of-living increases.
Littell went to immediateannuities.com, a consumer website that provides annuity quotes from major insurers, and looked for the lowest price on a deferred single-life annuity (with no death benefit) with a benefit of $500 a month and payments to start at age 65. The result: At age 50, it would take $51,000 for a woman to buy that annuity, compared with $47,500 for a man. A couple would pay $60,000.
If the woman is offered a lump sum of, say, $50,000, it might seem a wash. But if her company subsidizes early retirements and her plan includes features such as a cost-of-living adjustment, or if her lump sum offer is $40,000, that argues for staying in the plan.
Your investing expertise
If you've had long-term success in investing your own money, taking a lump sum may make sense. To earn a decent return, you'll probably have to leave the pension in equities for a few decades, which means coping with market swings.
"In times of volatility, like we had this summer, there's something to be said about that guaranteed check you know will show up in your mailbox every 30 days," said Matthew Sommer, director of retirement strategy for Janus Capital Group.
Also, an annuity's guaranteed income simplifies financial management, which is especially valuable later in life, when people are less likely to be capable of managing money.
Your cash needs
When the offer is between $10,000 and $50,000, the majority of people accepting it just cash it out, said McDaniel.3 That means paying income tax, and a 10 percent penalty if you cash out before age 59 1/2.
Cashing out early is a cardinal sin of personal finance. Tax-deferred investment vehicles let the earnings on money compound, year after year. Also, income from cashing out could push you into a higher tax bracket. 
Littell, who isn't a fan of the lump sum, points out that one good use of it would be to defer tapping Social Security until you're old enough to get the maximum benefit. And when the cash is in your investment account, you can leave it to children, other heirs, or charity.

How to Become a Millionaire (CSMonitor)

Secret millionaire donates her fortune to Lake Forest College. Here's how she did it. / The Christian Science Monitor - CSMonitor.com

When the Sky Falls - Ben Stein in the NY Times

October 26, 2008
Everybody’s Business
You Don’t Always Know When the Sky Will Fall

By BEN STEIN
NOW, as the great Phil Rizzuto used to say, for “some high hops and short stops” — only not in sports, but in finance and life.

First, I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?

Well, I am just a person. I don’t have any magical powers to foresee the future. In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.

Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.

(By the way, it’s a disgrace that Mrs. Schwartz, a mainstay of economic insight since before World War II — as well as my late mother’s college roommate at Barnard — has not been a Nobel laureate. That hints at a dismal sexism in the dismal science.)

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.

After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.

The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me. And credit-default swaps themselves are something of a mystery. They are derivative instruments that supposedly insure a bond or similar entity against default. In fact, they are a wager about the possibility of default of anything, and the potential payouts for the wagers that have been made are many times larger than the value of all the subprime mortgage bonds that ever were.

The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.

Now let me move to another point: all of the recent misery, including the stock market’s plunge, the disasters at Fannie Mae and Freddie Mac, the loss of retirement savings. These did not happen out of the blue. The catastrophe of giving bonds ratings far higher than they deserved did not happen by chance. And endlessly rosy reports from banks and investment banks about their health did not result from a butterfly flapping its wings in China.

Human beings did these things. The harm to the American people and to the world has been substantial. There has been real pain here. Why is it taking so long to find out who did what and whether laws were broken? That’s what prosecutors are for.

And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.

“What do they do?” she asked, looking worried.

“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”

“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.

This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.

FINALLY, I’ll turn to the oil companies. When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again. Very expensive projects that the oil companies commenced, like extracting oil from tar sands in Canada, may now be major money losers.

What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?

Will we ever learn that they are just dust in the wind, like the rest of us? Probably not.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.