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The Guppy Multiple Moving Averages
By Jason Mitchell
What Are The Guppy Multiple Moving Averages ?
The Guppy Multiple Moving
averages are nothing mre than two sets of moving averages each representing differing time frames.
The first set is known as the shorter term group as it is made up of shorter term averages between 3 and 15 periods.
The second set is known as the longer term group as it is made up of longer term averages between 30 and 60 periods.
When placed together on a chart they offer a dynamic way of analysing price in the broader context of the
share. I was first made aware of this indicator and these time frames by Daryl Guppy in his books, as such I refer
to them as Guppy Multiple Moving Averages.
The above chart shows the Guppy Multiple Moving Averages (MMA as I will refer to it from now on). The blue group
on the above chart (and all charts on this site) represents the shorter term group, while the red group shows the longer term group.
Daryl Guppy suggests this color system as the red is more prominent and this is most important group to analyse in some ways.
How Are The Guppy Multiple Moving Averages Calculated ?
Basically the indicator is just
a whole lot of exponential moving averages (chosen specifically) overlayed on one chart. See Moving Averages for more information on how a moving average
is calculated. The following is the moving averages as Daryl Guppy promotes (see "Chart Trading" page 173 Daryl Guppy, Wrightbooks 1999):
Short Term Group:
* 3, 5, 7, 10, 12 and 15 Period exponential moving averages
Long Term Group
* 30, 35, 40, 45, 50 and 60 Period exponential moving averages
What Does The Guppy MMA Tell Us ?
Daryl Guppy suggests that the indicator is
best used when analysed in trending situations. Basically Daryl describes the longer term group as the indicator that tracks
the longer term group of investors in the market and in particular the instituitions who have big money and need to move it slowly.
He suggests the shorter term group is more akin to the action of traders as they buy and sell in to the market. While he does not believe or
suggest that these indicators actually do track these groups, it is helpful to think of them this way for analysis of the
indicator. The unique dynamic appearance of the MMA's allows us to gauge shorter term price action and place it in context with
the longer term movements. I use it to assess trend strength and to gauge the position of price within a trend. See below for more details on
interpretation.
Interpreting the Multiple Moving Averages
The Guppy MMA is a very useful toool if interpreted correctly
within a trending market. While no indicator can give predictions about the future of a stock price, the guppy
Multiple Moving Averages are in my opinion unequalled in determining the probability of trend continuation.
In order to explain the MMA I will give my interpretation of the information Daryl presents in the market place.
Please remember I am not speaking for Daryl here, I am merely giving my interpretation of his information. I would
recommend any one interested in the indicator to buy his books and subscribe to his newsletter. They are
both great resources. The easiest way to understand the Multiple Moving averages is to think about them in terms of tracking two
different groups of traders in the market place. Of course the indicator does not actually
track these two groups it is just a way of thinking about the indicator to make it easy to understand. The long term group
is representative of the Long Term
buyers such as Fund Managers, Banks and other big institutions. The short term group is representative
of the shorter term traders such as private traders and smaller investment companies. Bacause the fund managers
have a lot of money they must enter the market slowly, they are patient and sit waiting in the wings as
prices come back to what they believe is a more acceptable level. The traders on the other hand have smaller
amounts of money and can buy and sell without creating too much of a disturbance in the market. If price action
is purely a rally driven by shorter term traders, this will be displayed in the MMA by the short term group spreading and rising.
If however the price is rising over the longer term, it is probable that the larger institutions are also increasing there
holdings as they re-weight portfolios and try and stay ahead of the market. This is shown by the longer term group spreading
and rising. If traders consistently drive prices up in a rally and then as prices retrace the larger
buyers move in and pick up the available stock there is only one thing that usually happens to the price - it goes up.
This series of higher lows is what creates a trend, and the MMA can give us some idea of whether it will continue or
not. The following charts are designed to demonstrate how I view and more importantly use the MMA.
The above chart gives us a good example of the main strength of the Guppy MMA. At the point shown
a trendline has been broken and the price has closed below this line twice. If we use Daryls MMA
interpretation we could analyse the share like this. The short term traders are not buying the stock,
in fact the short term group in the MMA (blue lines) have compressed and are turned down, suggesting
the traders are beginning to sell this stock. The long term group however is well spread and rising,
the institutions it would appear are still happy to buy the stock as price retraces and this is shown
by the fact the long term group is well spread and rising. Combining the information taken from
the MMA we could say that although the traders are not actively buying this stock at the moment,
the institutions are likely to pick up the stock as prices pull back. If we owned the stock, we might at this
point decide that the price is unlikely to fall too much further in the short term as the larger
buyers pick up the stock at a reduced rate. It may be acceptable to wait and see if the shorter term
traders were going to start buying again as has happened in the past as prices pulled back. Would I buy
the stock here. I would not. But I would put it on a watchlist and buy on the first sign of a rebound
on increased volume. This would suggest that maybe the traders are moving back in. Would I sell the stock
here, if I was in profit no, if I was losing money yes. The following chart shows what
happened to the stock from this point.
The first arrow shows the stock at the point of the previous discussion. Notice the blue group begins
to expand slightly again here suggesting the traders are beginning to become active again. The long term group
remains well spread and the parrallel movement of the MMA is an ideal setup for a trending stock. The second arrow
is from a previous article.
What Question(s) Does the MMA Answer
* What is the underlying strength of this Trend ?
* How far in to the developing trend is this share. Therefore is it an emerging trend, an established trend etc.
The first question regarding
underlying strength is shown in the above example. A well spread long term group is indicative of a healthy
long term trend. Will the trend continue, who knows ? But it has been strong to that point. If the long term group
is highly compressed then the price has not been moving uniformly in any direction or the previous direction has
weakened considerably.
The MMA also allows us to ascertain where a share is in terms of trending action. For example see the following charts:
The first chart shows a stock as it
is in the emerging stages of it's trend development. This can be seen by the fact that the short term group
has crossed above the long term group and is reasonaby well spread. The long term group however is
compressed and only beginning to turn up, suggesting that there is some support beginning to grow
from the longer term traders, althogh this has not been established yet. The short term group is showing
that a short term trend has occured, the long term group however is not giving away any clues as to whether
this trend is likely to enjoy strength over the longer term.
The second chart shows the same stock a little further on. The Long Term Group is well spread and rising
suggesting the trend has been enjoying longer term support. The short term group has been reasonably steady
and has just started to move up sharply with prices, possibly creating a bubble situation.
What Are The Well Published Signals
* None
No Signal ? Then how do I use it?
For my mind the greatest thing
about this indicator is there are no real "signals" to say buy and sell. Instead this is a tool that
actually allows us to step back a little and analyse recent price action relative to past price action.
Rather than give us a signal it actually forces us to think about the stock price and the market sentiment
that is creating the prices. I suppose a well spread long term group is a signal of some kind in that
it suggests the trend has been enjoying continued support.
NOTE: Daryl Guppy does not seem to advocate the use of a cross over of the Guppy Multiple Averages as a signal and neither do I.
What Other Indicators Work Well With This
* Line Studies (particularly trend lines)
* Volume Based indicators such as the OBV, Chaikins Money Flow or Volume itself.
* JICD (personal Indicator)
General Notes
Personally I love the MMA for use in
trending markets and trending shares. You will notcie that most of the charts that are analysed here on the
site include the MMA and it is rare I enter a trend trade without looking at tis indicator. My belief
on trends is simple, buy shares that are going up and have had good support over both the long term and short
term. The guppy multiple averages allow me to ascertain whether this has happened or not.
This Article is written by Jason Mitchell
© Copyright Jason Mitchell 2006
Testing Results
Testing Results for the MMA will be available soon.