The 21-day exponential moving average (EMA) can be a powerful tool for investors. Though it is most powerful in a bull market, it has plenty of use during bear markets as well.
Like the commonly used 50-day moving average, the 21-day takes the closing prices of the past 21 sessions and averages them out. The main difference is that the most recent prices get a heavier weighting in calculating the average. So the 21-day exponential moving average is more sensitive the most recent price action.
We looked at the 100 best stocks of 2022 through the lens of the 21-day EMA. Even with a very conservative application, the 21-day line returned an average gain of nearly 30%. (This was calculated by taking proper pullbacks to the line and using realistic entries.)
Looking at the best stocks for 2022, energy was the dominant sector with 15 names in the top 20. This was due in large part to the Russian invasion of Ukraine and subsequent throttling of the natural gas pipeline into Europe. But it wasn't a simple straight line from the bottom to the top.
How To Trade Stocks: Expectation Vs. Reality
IBD research has found that with the biggest stock market winners, they tend to find support at the 21-day line after a breakout for at least several weeks. When they do break below the 21-day line, that can be your signal to take profits, often with gains of 20% to 30%.
In 2022, however, many stocks had to contend with the overhead supply of the Covid bear market. Investors were looking to sell and recoup their losses at practically every new high. Bases often corrected 30% or more.
Of the top 20 stocks of 2022, few held above their 21-day line for eight weeks following a breakout. When including stocks that shot up past their 20% profit taking targets, only eight had successful runs immediately following a breakout.
But keeping the bear market in mind, the 21-day line presented many opportunities to reenter these stocks and safely take a profit.
Occidental Petroleum's Jump From 21-Day Line
Occidental Petroleum formed a cup base from October 2021 to a breakout on Jan. 18, 2022 (1). The breakout stumbled, failing to clear the 5% buy zone and falling below the 7%-8% automatic stop (2). It recovered sharply but only to move sideways before barely grazing the 20% profit target. It's unlikely many traders captured a full 20% profit.
The Feb. 11 high of 43.16 was your resistance level and potentially your new entry (3). The following sell-off was the stock basically shaking off the rust of overhead supply.
Occidental had the added effects of a strong Q4 earnings report after market close on Feb. 24, as well as Russia's all-out invasion that day. After a day to digest, Occidental shot up 12% with the highest volume in months (4) as the 21-day line offered support.
With an entry at 43.16, you could have quietly held the stock for a 30% gain until it closed below the 21-day line on April 22 (5).
This article was originally published Jan. 19, 2023, and has been updated.
