If you read the previous Mom Chronicles article, you might understand how the Simple Moving Average (SMA) can help you to identify trends. But you may wonder how these trends are plotted. Additionally, if you plan to hold on to your securities for a year or more, why bother with learning about moving averages?

First, a brief recap: You learned last week that you can take the open, middle, or closing price to determine your SMA, and that you can use a daily, weekly, or even monthly figure to calculate a moving average (MA). Additionally, when you use the Yahoo! portfolios, you also have a choice between a 50- and 200-day MA. What you use to determine your MA is up to you, but remember that the shorter MA time frame will be more sensitive to changes and will, therefore, display more indicators.

When you added the moving average to your portfolio, you only see numbers; so, it's a little difficult to see how a MA lags behind a chart's jagged lines or how the moving average lines might indicate a trend. You might take a short trip to StockCharts.com so that you can visualize how the 50- and 200-day moving averages differ and how they look when they're applied to a chart.

If you look at the very first image on that StockCharts.com page, you'll see the differences between the 50- and 200-day MAs. The former, shorter time frame follows the chart's price line closely, whereas the 200-day MA lies further away from the chart's price line and it's smoother than the 50-day MA line.

To explain the difference between the two time frames is like explaining the difference between a day trader and a long-term investor. The day trader wants the MA to closely follow the price line, as they want more indicators to help make short-term technical decisions. The 200-day MA, however, is a little more laid back and relaxed, just like a long-term investor might act!

Since StockCharts.com does a great job on its explanations for moving averages, I'll just take you to your Yahoo! portfolio so that you can practice what StockCharts.com preaches. I'll help you focus on how to spot trend identification/confirmation and resistance and support movements through the new Yahoo! Beta charts.

Say that you're ready to accumulate more stock in a dollar-cost averaging strategy, but you maintain control over the day and time that you want to purchase that stock. You can chart a MA trend for any given security to help determine a point where you would be able to purchase that stock at the lowest possible price for a given month, week, day, or hour. And, if, after a period of time, you're ready to exit that stock, you can use the MA to determine a time when you'd like to sell that stock at a higher price.

Your Yahoo! portfolio charts provide tools that can help you to plot trends. Go to your Yahoo! portfolio and choose a stock in that portfolio. Click on that stock's ticker symbol, and you'll arrive at the page that contains a chart for that stock. Click on that chart to enlarge it, and then click on the Yahoo! Beta promotion located above that chart. A new chart will appear that allows you to play around with technical indicators.

Click on the "technical indicators" tab at the top of that chart and then click on the SMA indicator located at the top of the drop down menu. A box will appear that shows a 50-day MA choice. In the empty box below that "50" type in "200." Click "Draw" and two MA lines will appear on that chart (green for the 50-day and orange for the 200-day). You can click on the time frame for that chart at bottom right, and those MA lines will change according to the time frames that you choose (from one day to "max").

Click around on the time frames for that stock chart until you find a period where the 50- and 200-day lines cross over each other (you may have a stock where this won't happen ever - it's possible - so pick another stock where you can see the crossover). Most charts will show a price line crossed by a MA line.

A crossover is a popular trading signal that occurs when the price of that stock crosses through a MA, or two MAs cross over each other. This type of signal is regarded as an early indication of the direction of future momentum. For instance, if you've been watching a stock for a long-term position, you might enter this purchase when the price crosses above a MA; you might exit that security when the price crosses below the MA.

On the other hand, if the green line (50-day) crosses above the 200-day line (orange), you might see that your stock rose in price after the crossover. This upward momentum increases when a short-term average crosses above a long-term average. On the exit side, many traders might choose to sell once the price of an asset falls below major moving averages, because it suggests that a downward momentum is likely to occur.

These points often are illustrated by lines that either resist or support a chart's movement, as you can see in the last chart illustration offered on the StockCharts.com page for moving averages. A supporting line does just that - the MA line appears to support the chart's price movement either upward or downward. Resistance is indicated when the MA crosses above the chart's price line and appears to keep that price line from moving upward above that MA line.

On the average (no pun intended) - these indicators do work. But, aberrations do occur, so use the MA(s) only as one indicator among many that you might use before you commit to an investment decision. I'll introduce you to some more technical indicators over the upcoming weeks so that you can take full advantage of your Yahoo! Beta charts.

In the meantime, have fun with the MA lines on that Beta chart. The more you practice, the more comfortable you'll become with this technical indicator.

Until Next Week, Linda Goin