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ANTICIPATING THE TREND LINE



A "moving" average is simply an average that is continuously recalculated. A 50-day moving average
of a price is an average of the past fifty days of closing prices that is recalculated daily. To roughly
recalculate this moving average, simply compare the price you are adding to the moving average
(i.e., today's closing price) to the price you are taking off (i.e., the price ten weeks ago). If the
new day is higher than the old one, the moving average will move up (i.e., uptrend), if lower it


will go down (i.e., downtrend).
Therefore, to anticipate the direction the moving average will head next, simply compare the
price area of the past few weeks with the prices around ten weeks ago. In other words, if current
prices are clearly higher than they were ten weeks ago, we can anticipate the ten-week moving
average will continue to move up; if lower, we can anticipate it will continue to move down.
For example, if eight, nine and ten weeks ago the S&P was trading in the low 1100's and it is
trading in the mid 1300's now, we can safely assume that the moving average will continue to
move up over the next few weeks. Numbers around 1100 are going to be dropped off the moving
average and numbers in the mid 1300's will probably be added; therefore, since the numbers to be
added are higher than those that are going to be dropped off, the average will move higher.
However, we are simply anticipating the most likely future direction of the moving average, not its
guaranteed direction. Keep in mind, should the current numbers (prices) suddenly change
significantly, then our anticipation of the future direction of the moving average must also change.
This "anticipation" concept is one you absolutely must fully understand in order to be able
to anticipate the movement of trend/momentum indicators (i.e., the lines). Therefore, to
repeat, in order to anticipate the most likely immediate future movement of any moving
average, simply compare the numbers you will most likely be adding to the moving average to
the numbers you will be dropping off. If you expect to be adding higher numbers than the
numbers to be dropped off, then anticipate that the moving average will move up; if the
numbers most likely to be added are lower than the numbers to be dropped off, then anticipate
that the moving average will go down.
To help me anticipate the future movement of the trend line, the first action I take when looking
at a chart is to count back ten weeks and circle the prices from the middle of that week. This
way I am able, at a glance, to anticipate how likely or unlikely it will be for the trend to change
in the immediate future. I do this by visually comparing current prices to prices ten weeks earlier,
i.e., those in the circle. If they are roughly the same, then the line could turn easily; if they are
far apart, then the line is unlikely to change direction anytime soon.
Look at the charts of the March Unleaded Gas and March Silver on the preceding pages and
compare the current prices to the prices ten weeks earlier. Do this and you will see at a glance
how difficult or easy it would have been to turn the existing trends. Suggest you also take a period
a month or two earlier and count back ten weeks from there and make the same comparison;
then see for yourself what the trend did in the ensuing weeks.
When trading futures we want to be positioned not only with today's trend/momentum, but
even more so we want to be positioned with tomorrow's trend and momentum. However, be
clear about what we are doing here; we are not trying to predict tomorrow's prices. What we are
trying to do is "anticipate" what our reasonably reliable trend/momentum indicator lines will look
like tomorrow, and the few days after.
The basic idea is that it is easier and more effective to anticipate or predict the future movement
of trend/momentum lines than it is to anticipate or predict price. Therefore, what we do is look
at the current price trend/momentum indicators, anticipate what these indicators most likely
will look like over the next few days, and then position accordingly. We are trading price, but we
make our trading decisions primarily by anticipating the most likely future direction and location
of our reasonably reliable trend/momentum indicators. If these indicators are pointing up, we
trade from the long side; if they are pointing down, we trade from the short side.
So, when using moving averages as indicators of trend/momentum, it is imperative that you constantly
look back at the numbers you will be dropping off the various moving averages and compare
these numbers to the ones most likely to be added. Whenever I look at an SMR chart my eyes
immediately check the numbers coming "off" of each of the three lines and compare these with
the numbers most likely to be "added." I do this starting with the trend, then going to the intermediate-term line, and finally to the short-term line. I do this every time, without fail, always] I
do this because it is the best way to anticipate where the lines most likely will be tomorrow and
the few days after that. You would be wise to train yourself to do the same.
We trade futures, not presents or pasts; therefore, anticipating the near term (i.e., next few days)
future location and direction of the trend/momentum lines is of utmost importance. While the
future price is unknown, it is possible to make an educated "guesstimate" of the future direction
and location of our reasonably reliable trend/momentum indicators (i.e., the lines]. Since these
indicators are directly related to the price movement, if we are consistently positioned with
them, then we should be consistently on the right side of price 
movemen