Hi,
Today I was seeing one interesting factor of market movements. How much it takes for prices to move away from their moving averages, so that they again converge back close to their moving average.
For the purpose of study I picked up Canadian Index(TSX) and 10 other Canadian Sub Indexes. The study threw some very interesting facts.
Historically in past 7 years, TSX has never moved more than 8% above its 100 day moving average. Whenever it does so, there is a mean convergence. This convergence either could be with sudden drop in price (often it happens in the form of profit booking) or this convergence could be if prices consolidate and average moves up.
Benefits of this indicator:- 1. Whenever the index price is moved more than normal from its average, it need to converge back. So if someone follows moving average, which is a lagging indicator, one can exit the stock much before than the price-average crossover (normal indication to sell-buy).2. In trending market when ever the convergence comes closer to 0, it is a good time to buy or re-enter the stock.
Very soon I will post my study on 10 Canadian Sub Indexes, which shows sooem startling facts. As of now just look at the TSX convergence chart for 100 day moving average.
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