Weekly-average and price-channel states on sector depositary baskets

The shared weekly-average pair

The case study applied the same 20-week and 50-week simple moving averages to four industry depositary baskets covering oil-service, biotechnology, telecommunications, and internet companies.

The 20-week simple moving average is the arithmetic mean of weekly closes over a 20-week lookback and is the shorter trend baseline. The 50-week simple moving average is the arithmetic mean of weekly closes over a 50-week lookback and is the longer trend baseline and a pullback reference.

How the baskets were built

Each basket was described as a cancelable depositary product whose holdings were chosen using market capitalization, liquidity, and price-to-earnings among other factors, and could be equally weighted or capitalization-weighted.

A sector depositary basket is an exchange-listed holding of several companies from one industry that can be traded as a single instrument and, in this case study, could be canceled into the underlying shares.

Oil-service basket

The oil-service basket moved above its 20-week simple moving average in the fourth quarter of 2003, then later pulled back and was described as holding near its 50-week simple moving average.

Editorial. That sequence is a supported pullback: a decline that holds at a pre-stated average after an earlier rise above the shorter baseline.

Biotechnology basket

The biotechnology basket cleared its 20-week simple moving average in the fourth quarter of 2002 and its 50-week simple moving average late in the first quarter of 2003, as the shorter average was moving above the longer one. That change of state is an average crossover.

By spring and summer 2004 the biotechnology basket had fallen back below the 20-week average and then the 50-week average, with the next support area identified near the third- and fourth-quarter 2003 lows.

Editorial. The earlier clearance is a breakout with an average crossover. The later slip below both averages is a dual-average breakdown, and the 2003 lows are the price-channel bound named as the next support area.

Telecommunications basket

After the 2002 declines, the telecommunications basket remained inside a slowly contracting trading range, including brief rises above largely flat 20-week and 50-week averages in the second quarter of 2003 and the first quarter of 2004.

A strong move above the fourth-quarter 2002 highs was treated as the price-channel condition required before a more committed bullish case for the telecommunications basket.

Editorial. This is a trapped range. Range contraction is a multi-quarter narrowing of highs and lows, including around flattened weekly averages, that keeps price from establishing a new directional state. Brief rises above the averages were not enough without the prior-range break.

Internet basket

The internet basket cleared its 20-week average in the fourth quarter of 2002 and its 50-week average in the first quarter of 2003, then by the start of the third quarter of 2004 had slipped below both averages.

Editorial. The later reading is a dual-average breakdown. The same weekly-average pair that classified the earlier clearance later reversed that state, still without a change of lookback.