Section 1.1: Defining the Moving Average

To clarify, a simple moving average (SMA) is computed by calculating the arithmetic mean of a specified set of values over a designated time frame. In simpler terms, stock prices are summed and divided by the count of prices in that set. The formula for calculating the SMA is as follows:

text{SMA} = frac{A1 + A2 + A3 + ldots + An}{n}

When the moving average value rises, it typically signifies an upward trend, while a declining average suggests a downward movement.

Golden Crossover Explained

When a short-term moving average, such as the 10-day average, crosses above a longer-term average, like the 50-day average, this is known as a "golden crossover," indicating bullish momentum. Conversely, if the shorter average crosses below the longer average, it's a bearish signal.

Now, let’s put this into context.

Assuming we're observing a 10-day moving average, we can express today's moving average as:

text{Today MA} = frac{A1 + A2 + A3 + A4 + A5 + A6 + A7 + A8 + A9 + A10}{10}

This should be greater than:

text{Yesterday MA} = frac{A0 + A1 + A2 + A3 + A4 + A5 + A6 + A7 + A8 + A9}{10}

We recognize that A0 is no longer relevant as it falls outside the moving average window. Thus, for today's moving average to increase, the closing price today must exceed the closing price from 10 days prior.

Section 1.2: Visualizing the Traffic Light System

To illustrate this, consider the Tesla stock chart. The red line represents the 10-day moving average, while the yellow line denotes the 25-day average.

The question arises: "What is the minimum closing price of TSLA needed for a bullish golden crossover?"

Let's analyze:

If today's closing price surpasses the 10-day average from 10 days ago, the 10-day moving average will reflect an upward trend.

Here's your ideal traffic light system:

• If the closing price is above the red dot (10-day MA), it will rise.
• If it's above the yellow dot (25-day MA), it will also rise.
• If it's above the green dot (50-day MA), that will rise as well.

The sequence indicates a bullish trend when the short-term MA is above the mid-term, and the mid-term is above the long-term.

Examples of Market Behavior

• Bullish Scenario: On April 24, 2024, Google’s stock price at $161 is above the 10-day moving average, suggesting an upward trend unless it drops below $160.79.
• Bearish Scenario: Apple's stock at $193.05 falls below the 10-day moving average. If it closes below $191.45, it may drag the other moving averages down, threatening a crossover.