Versus MA (Long Term)

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Volume 17 – Versus MA (Long Term)

The larger upper frame shows a price series drawn on a log scale with either a 200 day or 40 week moving average (depending on the frequency of the price series). The ratio of the price series to the moving average is drawn on a log scale in the lower, smaller frame. The same smoothing (200 day or 40 week) is applied to the ratio (heavier line). The horizontal axis is drawn at 1.00 (where price and its moving average coincide).

This chart format provides a unique way of viewing moving averages. The ratio is an oscillator (VSMA). Since it is a ratio, it has been normalized, so it doesn’t matter whether price is 100 or 5000 — a VSMA reading of 0.75 means the same thing (0.75 means price is 75% of its MA). It allows the investor to place current price action in perspective by comparing the current oscillator value with previous extremes. For example, the 1987 low on the 40 week DJIA oscillator was almost as deep as the 1974 low.

Dow Jones Industrials, weekly, 40 week MA, 1960-96
Dow Jones Transports, weekly, 40 week MA, 1960-96
Dow Jones Utilities, weekly, 40 week MA, 1960-96
NASDAQ Composite, daily, 200 day MA, 1965-96
NYSE Composite, daily, 200 day MA, 1967-96
Standard & Poor's 500, weekly, 40 week MA, 1960-96
Gold (in US$), daily, 200 day MA, 1968-96
Silver (in US$), daily, 200 day MA, 1968-96
British Pound (in US$), weekly, 40 week MA, 1960-96
German Mark (in US$), weekly, 40 week MA, 1960-96
Japanese ¥en (in US$), weekly, 40 week MA, 1960-96
Swiss Franc (in US$), weekly, 40 week MA, 1960-96

The upper frame shows the DJIA and its 40 week MA, while the lower frame shows the ratio of the DJIA to its 40 week MA, and the 40 week MA of that ratio.

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The ratio of price to its moving average has advantages over traditional momentum. With traditional momentum (the ratio of today’s price to the price n periods ago), large price moves create an "echo effect". You know in advance that 200 trading days after the August, 1987 peak, 200 day momentum will rise dramatically as the denominator of momentum drops dramatically. This "echo" has nothing to do with today’s price action. By using a moving average for the denominator, the VSMA oscillator avoids this deceptive behavior. It also tends to smooth the oscillator (as compared to raw momentum), since the denominator is smoothed. It does this without sacrificing sensitivity to current prices, since the numerator is the unsmoothed current price.
VSMA reacts to today’s price swings, not those of the past.

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Last modified: April 06, 2005