Short Term Moving Averages

Short term moving averages are used as lines of reference, or for spotting trends.
 

Daytraders will use moving averages based on 14dma (14 day moving average) or even 5dma for general trends, they even get down to 5min and 1min moving averages.

The chart below has a 100dma and also a 50dma. An interesting thing happens when you put two different time frames together, you get two lines that move around each other.




The blue line is a 100dma, you can see how it showing the general trend of the stock. The brown line is a shorter term 50dma, it is more volatile as it more closely follows the actual day to day moves (averaged over 50 days).

Here comes the fun part: See how the 50dma moved above the 100dma Jan 04 (first blue arrow). This indicates to us that the short term trend was extremely stronger to the upside than the longer term 100 day trend. As you can see, the stock did indeed hit some nice highs. You will also note the opposite (red arrow) when the 50dma fell below the 100dma.

Look at July 04, see how the 50dma once again moved above the 100dma? I good indication of short term strength kicking in. GE went from $32 to $37 over the following months. Now look how the trend changed when the 50dma fell below the 100dma in July 05, this indicator told us that weakness is kicking in and GE subsequently dropped from $35 to $33.