Using moving averages with bullishtrending candlestick patterns to confirm trends

If you haven't yet made your way through my discussion of technical indicators in Chapter 11 or you need a refresher, the first rule of thumb with using moving averages as trend indicators is if a security's price is above the moving average, an uptrend is in place. With that in mind, take a gander at my first example of combining moving averages with bullish-trending candlestick patterns.

Charting the moving average and a bullish-trending pattern

Figure 14-5 is a chart of the stock for Yum! Brands (YUM). When you realize that Yum! Brands operates various fast food restaurants, including KFC, Taco Bell, and Pizza Hut, you can understand where it got its company's name and stock symbol.

Figure 14-5:

A chart of YUM featuring a couple of bullish-trending candlestick patterns and ten-day moving average that confirm an uptrend.

Figure 14-5:

A chart of YUM featuring a couple of bullish-trending candlestick patterns and ten-day moving average that confirm an uptrend.

Candlestick Chart Moving Averages

In Figure 14-5, YUM is trading over its ten-day moving average for several weeks. In the middle of that sustained uptrend, two bullish thrusting line patterns appear. The patterns appear about two weeks apart, and after both occurrences, the stock continues to trade higher. These patterns and the ten-day moving average certainly confirm each other on this chart. The moving average is tested several times, but the price holds for quite awhile until it starts to top out on the right side of the chart. If you monitor this situation on a chart, you'd initiate a long position after spotting one of the two patterns, and ride it until you stopped out or noticed a trend reversal signal of some sort.

The trend reversal signal shows up rather quickly, and before I move on to the next example, I want to point out just where the uptrend in Figure 14-5 starts reversing. I didn't highlight it on the chart, but if you look closely, you can spy a bearish reversal candlestick pattern at the top of the uptrend. It's a three outside down pattern, and it's another case of how getting very familiar with the appearance of candlestick patterns can pay off when trading.

BEfr The example in Figure 14-5 uses only one moving average, but don't feel like you have to stick to using just one. You may very well want to add more moving averages to your charts, and using two or more can be revealing if you can keep up with them all.

Using a couple of moving averages and a bullish-trending pattern

When you use two moving averages on a candlestick chart, the trend is defined by the location of one moving average relative to the other moving average. When the moving average with the lower number of days is trading higher than the one with more days, the trend is positive. For the examples in this chapter that include two moving averages, I use 10- and 20-day moving averages. So when the 10-day moving average is higher than the 20-day moving average, the trend is positive. Sound simple enough? I'll dive right in with an example.

Sticking with the fast food theme, Figure 14-6 is a chart of McDonald's (MCD). It's an Illinois-based chain of hamburger restaurants that often uses a clown in its ads — maybe you've heard of it? This chart includes both a 10-day and a 20-day moving average, and for much of the chart the former is higher than the latter, which means that an uptrend is in place, and after looking at the chart it's hard to argue.

Figure 14-6:

A chart of MCD with a 10- and 20-day moving average and a bullish-trending candlestick pattern that confirm an uptrend.

Figure 14-6:

A chart of MCD with a 10- and 20-day moving average and a bullish-trending candlestick pattern that confirm an uptrend.

As if the evidence provided by the moving averages weren't enough, further assurance of the bullish trend comes in the form of a bullish thrusting line pattern. It turns up just a few days after the 10-day moving average has cleared the 20-day moving average. Looks like an uptrend is on the way! And nothing makes traders hungrier than a strong bullish candlestick pattern appearing early in an uptrend.

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