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Trader's Corner

That Hidden Average

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Every technician has a favorite average. Mine is the 100-ema, closely followed by the 100-sma and 130-ema. On websites devoted to trading, you'll hear traders debate the virtues of the 20-, 21- or even 22-sma, one over the other. Market guru Pring mentions the importance of the 10- and 30-sma's when studying weekly charts for moving-average crossovers. All technicians have their favorites and are willing to defend their choices.

A couple of years ago, serendipity turned up an average that perhaps ought to be included on many daily charts. A couple of years ago, OptionInvestor's Jonathan Levinson mentioned that he was watching 72-sma on an intraday chart. I misread -ema for -sma. When I subsequently switched from an intraday chart to a daily one, the congruence of daily support and resistance and the 72-ema became readily apparent.

Note: This article was prepared a week ago, including charts, so that charts do not reflect current values.

Annotated Daily Chart of the OEX:

The 72-ema's support doesn't always hold true.

Annotated Daily Chart of the OEX:

The 72-ema's importance as possible support and resistance again became important this spring and summer.

Annotated Daily Chart of the OEX:

The 72-ema appears to have special significance on some tech indices. Since this article and these charts were prepared, the OEX Thursday tested that 72-sma and fell back from that test.

Annotated Daily Chart of the SOX:

Even some individual equities appear to trade in relationship to the 72-ema.

Annotated Daily Chart of GOOG:

Annotated Daily Chart of SIRI:

Why does the 72-ema play this role? Searches of technical analysis texts and many trading-related sites turns up no other mention of the 72-ema. Some articles related to the Nikkei 225 have mentioned the 75-sma, and I at first theorized that it was the kissing cousin of the 72-ema, the 75-sma, that was actually playing a part in trading behavior. I theorized that Asian investment in U.S. equities might be leading to the importance of an average more closely watched, or at least more often mentioned, than those often watched in the U.S. However, a study of charts soon dispelled that opinion.

Annotated Daily Chart of the OEX:

While the 75-sma does show some correspondence to support and resistance, that relationship doesn't appear as strong as does the correspondence of the 72-ema.

Does 72 represent the number of trading days in an average quarter, another theory I tested? Afraid not. The four quarters of 2005 hold 63, 65, 64 and 63 trading days, respectively.

Every theory runs up against the same blank wall. I have no idea why this average serves as important support or resistance through many periods for many indices and some equities. It just does. So, especially if you're an OEX trader, clutter up your charts a little more than they're already cluttered and add in that 72-ema when you want to see where support or resistance might lie.
 

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