{"id":12528,"date":"2022-05-23T08:30:43","date_gmt":"2022-05-23T12:30:43","guid":{"rendered":"https:\/\/morpheustrading.com\/blog\/?p=12528"},"modified":"2023-01-24T11:40:40","modified_gmt":"2023-01-24T16:40:40","slug":"20-ema-market-timing","status":"publish","type":"post","link":"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/","title":{"rendered":"How to Know When it&#8217;s Time to Start Buying Stocks Again"},"content":{"rendered":"<figure class=\"wp-block-image size-large\"><img decoding=\"async\" class=\"wp-image\" src=\"https:\/\/new.morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/dip-a-toe-718x479.jpeg\" alt=\"When to dip a toe in the stock market\" title=\"\"><\/figure>\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">TABLE OF CONTENTS<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#When_stocks_start_bouncing_after_a_strong_downtrend_how_do_you_know_when_its_safe_to_get_back_in_the_water_The_20-day_EMA_will_show_you_the_way_Heres_how%E2%80%A6\" >When stocks start bouncing after a strong downtrend, how do you know when it&#8217;s safe to get back in the water? The 20-day EMA will show you the way! Here&#8217;s how&#8230;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#Market_timing_Staying_safe_in_a_weak_market\" >Market timing: Staying safe in a weak market<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#Why_the_20-day_EMA\" >Why the 20-day EMA?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#How_it_works_Putting_the_20-day_EMA_into_play\" >How it works: Putting the 20-day EMA into play<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#Avoding_false_buy_signals\" >Avoding false buy signals<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#Third_times_a_charm_20-day_EMA_confirmation\" >Third time&#8217;s a charm: 20-day EMA confirmation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#How_the_20-day_EMA_signal_has_worked_in_the_2022_bear_market\" >How the 20-day EMA signal has worked in the 2022 bear market<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/morpheustrading.com\/blog\/20-ema-market-timing\/#The_beauty_of_a_simple_trading_system\" >The beauty of a simple trading system<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"When_stocks_start_bouncing_after_a_strong_downtrend_how_do_you_know_when_its_safe_to_get_back_in_the_water_The_20-day_EMA_will_show_you_the_way_Heres_how%E2%80%A6\"><\/span>When stocks start bouncing after a strong downtrend, how do you know when it&#8217;s safe to get back in the water? The 20-day EMA will show you the way! Here&#8217;s how&#8230;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>When putting together a winning trading <a href=\"https:\/\/morpheustrading.com\/best-swing-trading-strategy\" target=\"_blank\" rel=\"noreferrer noopener\">system<\/a>, knowing which stocks to buy is an important piece of the puzzle.<\/p>\n\n\n\n<p>However, knowing exactly <em>when<\/em> to buy may be even more important!<\/p>\n\n\n\n<p>When should you be in &#8220;SOH mode&#8221; (sitting on hands) and mostly in cash?<\/p>\n\n\n\n<p>When should you step on the gas pedal with more trades and larger position size?<\/p>\n\n\n\n<p>Your level of consistent, long-term success as a stock trader or investor closely depends on knowing the answers.<\/p>\n\n\n\n<p><em>CONTINUE READING<\/em> to discover how the powerful 20-day EMA can show you the way!<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Market_timing_Staying_safe_in_a_weak_market\"><\/span>Market timing: Staying safe in a weak market <span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The Nasdaq is currently down 27% year-to-date and has surrendered all of last year&#8217;s big gains.<\/p>\n\n\n\n<p>But during this same period, <em><a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">The Wagner Daily<\/a><\/em> portfolio is only down 4%.<\/p>\n\n\n\n<p>Currently 100% in cash, the portfolio is also poised to start racking up explosive gains.<\/p>\n\n\n\n<p>This is the result of following a simple, rule-based <a href=\"https:\/\/new.morpheustrading.com\/blog\/market-timing-system\/\" target=\"_blank\" rel=\"noreferrer noopener\">market timing system<\/a> that revolves around one key indicator:<em> <\/em><strong><em>the<\/em><\/strong><em><strong> 20-day exponential moving average<\/strong><\/em> <em><strong>(20-day EMA).<\/strong><\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_the_20-day_EMA\"><\/span>Why the 20-day EMA?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>We have shared our proven swing trading system with thousands of traders since 2002.<\/p>\n\n\n\n<p>Throughout, we regularly emphasize the importance of a <strong>simple trading strategy that can easily and effectively be implemented.<\/strong><\/p>\n\n\n\n<p>To avoid analysis paralysis, the Morpheus trading system focuses on reliable chart patterns, relative strength, and a few <em>basic<\/em> technical indicators such as volume and moving averages.<\/p>\n\n\n\n<p>When it comes to the market timing element of our trading system, it&#8217;s all about the 20-day EMA!<\/p>\n\n\n\n<p>Although we also plot other moving averages on the daily chart, <em>there&#8217;s just something about the 20-period moving average that simply works.<\/em><\/p>\n\n\n\n<p>The time frame is not too short (10-day MA), nor too long (50-day MA) for reliable <a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">swing trade signals<\/a>.<\/p>\n\n\n\n<p>Much like Goldilocks discovering porridge of the perfect temperature, the 20-day moving average time frame is <em>just right!<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"718\" height=\"461\" src=\"https:\/\/new.morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-718x461.jpeg\" alt=\"20-day EMA\" class=\"wp-image-12608\" title=\"\" srcset=\"https:\/\/morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-718x461.jpeg 718w, https:\/\/morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-110x71.jpeg 110w, https:\/\/morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-768x494.jpeg 768w, https:\/\/morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-1536x987.jpeg 1536w, https:\/\/morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/AdobeStock_261949008-2048x1316.jpeg 2048w\" sizes=\"auto, (max-width: 718px) 100vw, 718px\" \/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_it_works_Putting_the_20-day_EMA_into_play\"><\/span>How it works: Putting the 20-day EMA into play<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>We apply the 20-day exponential moving average to daily charts of major indexes such as the Nasdaq or S&amp;P 500.<\/p>\n\n\n\n<p>The basic premise is this:<\/p>\n\n\n\n<p><em><strong>We increase market exposure when the price of an index is above the 20-day EMA, but quickly shift to mostly cash when it falls below the 20-day EMA.<\/strong><\/em><\/p>\n\n\n\n<p>When the Nasdaq or S&amp;P 500 is trending lower (series of lower highs and lower lows) <em>and<\/em> below a declining 20-day EMA. there simply isn&#8217;t much to do on the long side of the market. <\/p>\n\n\n\n<p>In this situation, <em><a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">The Wagner Daily<\/a><\/em> stock portfolio remains primarily cash, aided by quick profits from selectively <a href=\"https:\/\/new.morpheustrading.com\/blog\/fb-swing-short\/\" target=\"_blank\" rel=\"noreferrer noopener\">short selling stocks<\/a> with low-risk entry points. <\/p>\n\n\n\n<p><strong>But when the price eventually bottoms out and bounces above its 20-day EMA, that&#8217;s when it&#8217;s time to <em>pay close attention!<\/em><\/strong><\/p>\n\n\n\n<p>When an index starts bouncing off its lows, we first <em>look for the price to close above its 20-day EMA, then push higher within the next one to two days.<\/em><\/p>\n\n\n\n<p>However, there is a bit more to it than blindly buying stocks when an index moves above its 20-day EMA.<\/p>\n\n\n\n<p>Rather, there are a few <strong>key requirements to prevent false buy signals. <\/strong><\/p>\n\n\n\n<p>Let&#8217;s look at a daily chart of the S&amp;P 500 during its 2018 correction that led to a bullish reversal in early 2019:<\/p>\n\n\n\n<figure class=\"wp-block-image is-resized\"><a href=\"https:\/\/www.morpheustrading.com\/~rick\/\/charts\/2021\/220519SPX1.png\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.morpheustrading.com\/~rick\/\/charts\/2021\/220519SPX1.png\" alt=\"S&amp;P 500 daily chart from 2018-2019\" width=\"718\" height=\"495\" title=\"\"><\/a><figcaption class=\"wp-element-caption\"><em>Press chart to enable zoom<\/em><\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Avoding_false_buy_signals\"><\/span>Avoding false buy signals<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Above, notice the first two moves above the 20-day EMA only held above the moving average for three to four days before stalling and reversing sharply lower.<\/p>\n\n\n\n<p>Although the price reclaimed the 20-day EMA, there were a few <strong>key factors that led to a false buy signal:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The 20-day EMA was not yet <em>rising<\/em> (it was sideways at the time)<\/li>\n\n\n\n<li>The S&amp;P 500 price ran into resistance of its prior swing high (from October 2018)<\/li>\n\n\n\n<li>The 5-day MA (not shown) failed to cross above the 20-day EMA<\/li>\n<\/ul>\n\n\n\n<p>Again, the basic premise of the 20-day EMA signal is simple, but the factors above must be considered to increase the odds of success.<\/p>\n\n\n\n<p>Further, even if all the signals are perfectly aligned, it&#8217;s note we still <strong>start with small risk exposure and gradually increase as we build on successful trades.<\/strong><\/p>\n\n\n\n<p>When there is a false buy signal, losses are small because our <em><a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">Wagner Daily<\/a><\/em> portfolio exposure remains light.<\/p>\n\n\n\n<p><iframe loading=\"lazy\" width=\"580\" height=\"680\" src=\"https:\/\/4966a6ff.sibforms.com\/serve\/MUIFAOyl4S5Qdajs7q3LemJKudDbMHB24p2SAorKuWWuauy3e1eFPtLgTh5BoPCh3XzIz3rZE_YyIqvc9IEl_xMkRg3MTlG0Zn5eqY3J2eKMjOE-jPuS43ZXewKssUaGt1kllR56wV2u1lBXoYfKSzEgeeTjLyjdSao87VmqsbDtgcy4jNwHMSzf0Rl346rIoBjtZwf-DX0V6tbn\" frameborder=\"0\" scrolling=\"auto\" allowfullscreen style=\"display: block;margin-left: auto;margin-right: auto;max-width: 100%;\"><\/iframe><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Third_times_a_charm_20-day_EMA_confirmation\"><\/span>Third time&#8217;s a charm: 20-day EMA confirmation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>On the same chart above, notice the <em>third<\/em> cross above the 20-day EMA (early 2019) was a charm.<\/p>\n\n\n\n<p>Unlike the first two attempts, notice the price action held above the 20-day EMA for several days <em>and then rallied to a higher high<\/em> (rather than stalling lower).<\/p>\n\n\n\n<p>Furthermore, notice how this time the 20-day EMA had already started rising.<\/p>\n\n\n\n<p>The 5-day MA (not shown) had also crossed above the 20-day EMA.<\/p>\n\n\n\n<p>The price holding above the 20-day EMA and continuing to push higher was our signal to gradually increase long exposure as new <a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">swing trade setups<\/a> emerged.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_the_20-day_EMA_signal_has_worked_in_the_2022_bear_market\"><\/span>How the 20-day EMA signal has worked in the 2022 bear market<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Since the major indices are currently in a downtrend, let&#8217;s look at how the trusty 20-day EMA guide played has played out in the current 2022 bear market:<\/p>\n\n\n\n<figure class=\"wp-block-image is-resized\"><a href=\"https:\/\/www.morpheustrading.com\/~rick\/\/charts\/2021\/220519SPX2.png\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.morpheustrading.com\/~rick\/\/charts\/2021\/220519SPX2.png\" alt=\"$SP 500 2018-2019 \" width=\"718\" height=\"495\" title=\"\"><\/a><figcaption class=\"wp-element-caption\"><em><i>P<\/i>ress chart to enable zoom<\/em><\/figcaption><\/figure>\n\n\n\n<p>After a nasty plunge in January 2022, the bounce in early February led to two attempts to reclaim the 20-day EMA&#8211;but both <em>quickly<\/em> failed within a day or two. <\/p>\n\n\n\n<p>With both attempts, notice the 20-day EMA was still trending sideways to lower (not rising).<\/p>\n\n\n\n<p>Also, the 5-day MA never crossed above the 20-day EMA. <\/p>\n\n\n\n<p>Again, even if we decided to enter any new <a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">swing trades<\/a> at that time, our <strong>initial risk exposure would have been minimal.<\/strong><\/p>\n\n\n\n<p>But in mid-March, the price blasted through the 20-day EMA <em>and<\/em> broke out above a prior swing high.<\/p>\n\n\n\n<p>The 20-day EMA was also rising, while the 5-day MA had crossed above the 20-day EMA. <\/p>\n\n\n\n<p>This led to a <strong>valid buying window of several weeks<\/strong> before the price fell below the 20-day EMA again.<\/p>\n\n\n\n<p>Exactly how much exposure to take during this period would have depended on your trading system <em>and<\/em> the number of quality buy setups with proper, low-risk entry points available. <\/p>\n\n\n\n<p>When the price broke back below the 20-day EMA in early April, it was a warning sign to proactively raise stops and\/or lock in profits on any positions (if not already done so along the way).<\/p>\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img decoding=\"async\" class=\"wp-image\" src=\"https:\/\/new.morpheustrading.com\/blog\/wp-content\/uploads\/2022\/05\/simple-trading-strategy-718x479.jpeg\" alt=\"Simple trading strategy\" title=\"\"><\/figure>\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_beauty_of_a_simple_trading_system\"><\/span>The beauty of a simple trading system<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>An ideal trading system is one with proven results and can easily be followed on a consistent basis.<\/p>\n\n\n\n<p>The more complex a trading strategy, the greater the chance of making mistakes and not effectively applying it.<\/p>\n\n\n\n<p>That&#8217;s why we love the 20-day exponential as a powerful way to determine when it&#8217;s time to start buying stocks again after a sharp correction.<\/p>\n\n\n\n<p>Additionally, the 20-day EMA is a highly effective signal that can be applied to <em><a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">The Wagner Daily<\/a><\/em> trading strategy <em>or<\/em> your own, existing trading system.<\/p>\n\n\n\n<p>Ideally, use the 20-day EMA strategy with market indexes as your guide for timing buy setups in individual stocks. <\/p>\n\n\n\n<p>If the Nasdaq or S&amp;P 500 reclaims its 20-day EMA in the near-term and new buy setups start emerging, we will immediately start <a href=\"https:\/\/morpheustrading.com\/services\/swing-trade-alerts\" target=\"_blank\" rel=\"noreferrer noopener\">swing trading stocks<\/a> with more exposure on the long side.<\/p>\n\n\n\n<p>However, minimal <em>follow-through<\/em> in new buys, followed by an index breaking below its 20-day EMA, would promply force us to reduce exposure or go to cash.<\/p>\n\n\n\n<p><em>Remember to trade what you see, not what you think!<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When stocks start bouncing after a strong downtrend, how do you know when it&#8217;s safe to get back in the water? <\/p>\n<p>The 20-day EMA will show you the way! Here&#8217;s how&#8230;<\/p>\n","protected":false},"author":1,"featured_media":12606,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":"","_links_to":"","_links_to_target":""},"categories":[3],"tags":[],"class_list":["post-12528","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stock-trading-strategy"],"_links":{"self":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts\/12528","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/comments?post=12528"}],"version-history":[{"count":13,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts\/12528\/revisions"}],"predecessor-version":[{"id":15692,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/posts\/12528\/revisions\/15692"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/media\/12606"}],"wp:attachment":[{"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/media?parent=12528"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/categories?post=12528"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/morpheustrading.com\/blog\/wp-json\/wp\/v2\/tags?post=12528"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}