Yesterday’s newsletter kicked off our analysis of DraftKings (DKNG).
We unpacked Fibonacci retracements and how they applied to the DraftKings chart
Today, we cover one of our favorite topics – moving averages.
We’ll discuss:
- What they are
- How to create them
- Applying them to DraftKings
So, who’s ready to roll?
Moving average basics
There are dozens of ways to calculate moving averages. However, there are two main groups traders use: simple and exponential.
Simple moving averages (SMA) take the average price over a specified number of periods. Each data point is equal to any other.
Exponential moving averages (EMA) do the same thing except they give more weight to recent prices.
General consensus, and the one used for this analysis, is to use the closing price data points of whatever timeframe you look at. In this case, we used a weekly chart.
Traders look at moving averages in short, medium, and long terms.
Here are some general guidelines to the number of lookback periods traders use:
- Short-term: 5-15
- Medium-term: 15-100
- Long-term: 100+
Despite what you may have heard, there is no right or wrong way to do this.
The moving averages simply tell you where price is trending.
For example, if you find an 8-period moving average crossing below a 21-period moving average, that indicates short-term momentum has reversed.
For our purposes, we’re going to stick with the following selections: the 8 and 21-period EMA as well as the 200-period SMA.
Note: If there was one moving average that’s universally accepted, it would be the 200-period simple moving average.
How to apply moving averages to the DraftKings chart
Let’s take a look at the weekly chart of DraftKings with the moving averages drawn.
The solid orange line represents the 8-period EMA, while the solid purple line represents the 21-period EMA.
Notice how the stock rarely, if ever, drops down to the 21-period EMA. Also, the 8-period EMA consistently remains above the 21-period EMA. That indicates the short-term trend remains bullish (higher prices).
Even if moving averages aren’t your thing, history shows that as long as the 21-period EMA holds, price will continue higher.
Does that mean it always will?
Not at all.
That’s why we combine it with other pieces from our analysis.
Watch what happens when we overlay the Fibonacci work from yesterday.
All of a sudden, we find that the 21-period EMA comes in right near the 38.2% retracement line.
Is it exact?
No. It rarely is.
But does it increase the odds that price stops here?
Yes.
But trading and investing are about putting as much in your favor as possible.
That’s why tomorrow’s analysis rounds us out with the last key component – trendlines.
