In the chart-reading trade, the 10-week moving average is the Swiss army knife of investing tools.
It's a multifaceted indicator that can be used to add to your position, judge the health of a stock's advance and, finally, act as a sell signal that tells you a leader may be set to break down.
Two moving averages — the 10-week and the 50-day — tend to follow similar trajectories.
The 10-week average appears on weekly charts. It is the sum of a stock's weekly closing prices over the prior 10 weeks, divided by 10. A 50-day line sums up 50 days of closing prices and divides by 50. It shows up on daily charts.
Many institutional investors who favor buying on price weakness use the 50-day line as a marker. When the stock eases to test support, they step in to buy near the 50-day line. That buying tends to fuel the stock's rebounds used by CAN SLIM investors as add-on opportunities.
Green Mountain Coffee Roasters (NASDAQ:GMCR - News) made good use of its 10-week line after a breakout in November 2010 1. The stock pulled back in turbulent trade, but stuck close to its 10-week line 2.
It decisively retook support at the line, and cleared a 38.96 buy point in massive trade on Feb. 3 3.
The stock moved up, posted a sharp weekly reversal, then set up in a three-weeks-tight pattern.
But the pattern posed a problem. The weekly reversal set a buy point far above the stock's position.
The more accessible strategy was to buy on the rebound from 10-week support. On a daily chart, the stock never came within three points of its 50-day moving average. If you had been glued to a daily chart, you may have missed the cue.
But the weekly chart, on the day of the breakout, showed the gap between the stock's low and the 10-week line narrow to less than 40 cents — well within range of a rebound.
The stock burst off the rebound with a 40% gain in massive trade March 10 4.
Green Mountain offered three more buying opportunities at the 10-week average before Aug. 18, when it cut the line in heavy trade 5.
It recovered for a brief run to new highs, but the violation of the moving average marked the beginning of the end of the stock's winning run.