There will never be a guaranteed way for investors to accurately determine the future path of a stock — there are far too many unknown factors on Wall Street at all times. But there is a way to get a glimpse of where a stock should move based on facts, and investors do it by trading the 20-day simple moving average.
A simple moving average is a technical indicator that can help investors figure out if a trend is going to continue or reverse, becoming either bullish or bearish.
In case you haven’t noticed, we’re aggressive traders here at the Future of Wealth.
There’s no doubt about that.
If you’re a member of our Blitz service, then you know that we like to strictly trade options and we don’t like holding them for more than a week… or in some cases as little as 24 hours.
So what we do when we pull up our daily charts is pinpoint when a stock is going to move. And by doing the majority of our trading with this mindset, we’ve discovered the winning formula behind a quick trade: high volatility, high volume and a fast aggressive move in the right direction.
We’ve also found that the 20-day simple moving average is a great way to find them.
Let’s take a look at American Airlines Group Inc. (Nasdaq: AAL):
Looking at the chart above, you’ll notice how volatile AAL has been. This isn’t surprising… Since mid-March, airline stocks have been quick, aggressive movers (which we like).
Now when you see a stock gap up — whether it happens because of news or earnings — a lot of times investors just want to run in and buy it… You can see on the chart that volume surged over the previous five or so trading days, but do you know what happened?
Everyone and their mother ran to buy the stock, only to have it pull back for four days.
And did you notice where the price pulled back to? The 20-day simple moving average.
We like to think of the 20-day simple moving average as a magnet: No matter how high the share price, it will get pulled back to its moving average.
We call this “reversion to the mean.” It means that a stock usually gravitates to where it has prior price action and the 20-day moving average. Our job is to then find the bounce.
Here you can see that we started to bounce off of the 20-day moving average — that’s a bullish move. A quick aggressive trader (like us) can get in right there. OR, you can wait…
You have about five days of consolidation here, and guess what? The price stayed above the 20-day moving average.
If you’re looking for a rule of thumb when trading the 20-day moving average, make sure to follow this: Look for three-plus days above the 20-day simple moving average to confirm a bounce.
After waiting those initial three days, the stock moved higher until it hit a short-term pullback (still above the 20-day simple moving average). And after that pullback, now you can see AAL flagging to the upside.
You can also see how AAL’s chart changed from neutral to slightly bearish, and now it’s on a bullish run.
But AAL isn’t the only aggressive stock that’s caught our attention using this method…
Rocket Companies Inc. (NYSE: RKT) stock has been doing something unusual these past couple of days, and we think you might be interested in what we’re seeing and just confirmed…
Make sure to watch the video below to find out how we plan on trading RKT using the 20-day moving average.