MINNEAPOLIS ( Stockpickr) -- Traders like to use charts for directional signals on particular stocks. One of the more reliable bullish signs to trade stocks is a recent cross of the 200-day moving average. Such action suggests that a stock has significant buying support.
To the extent a stock has fewer sellers than buyers, such would always be the case. Of course, if it were only that simple, we could all retire nicely to the beach secure in the wealth built from such a trading strategy.
Investing is never that simple. Technicians have moved way beyond the moving day average, looking for clues in all sorts of places. Incorporating things such as volume , oscillation and candlesticks, traders will use whatever tools available to gain an edge.
What if there was another way?As a trained fundamental value investor, I use balance sheets and income statements to determine value instead of patterns on a chart. That said, I am certainly cognizant of what happens on the charts, and the 200-day moving average can be a valuable tool in finding investment opportunity. So today I'm taking a close look at a few stocks that crossed their 200-day moving averages recently. Quicksilver (ZQK - Get Report) Relying solely on one technical indicator is a bit dangerous for any number of reasons. One obvious flaw is that a stock can tick significantly higher on some news or rumor. That is the case with Quicksilver. The teen retailer shot higher yesterday on reports that French luxury retail group PPR might have an interest in buying the company. Shares jumped more than 20%. As a result, Quicksilver traded above its moving-day average on Thursday, but is the move sustainable? If the reports prove to be false, will the stock price collapse? Analysts expect the company to make 25 cents in the current year ending in October and a small improvement to 28 cents in the following year. At the after-pop price of $5.68, Quicksilver traded for 21 times forward earnings. That is a steep price considering the expected 12% earnings growth next year. With the stock down today, it is clear that simply crossing the 200-day moving average does not necessarily imply further riches. In fact, I would still sell the stock with the expectation that price continues to fall.