Each week, we select one email from the hundreds of thousands that we receive each week (slight exaggeration), and answer it live here in this forum thereby educating readers and making one lucky person famous for the day.

Email your questions in to asktheshadow@shadowtrader.net and we'll take it from there.

Dear Shadow,

I I am looking at the hourly chart on WLP. And I see the 20 MA going up while the 200 MA is going down. How can this be?

Frank R from MA

At first I thought this wasn't exactly Ask The Shadow material. Then I thought about it some more and realized that it definitely is, and that there could be some nuggets to be mined here for newer traders and budding technicians. Let's check the chart in question. I've put a blue box around the area where the hourly moving averages were indeed doing exactly what Frank said.

In the chart above, the 200ma is blue, the 50ma is red and the 20ma is green. The simple reason why they can move in different directions is due to their different lengths. This causes the different moving averages to move at different speeds. Since the 20ma for instance plots a line which is a rolling average of the last 20 periods, its going to hug prices closer and move faster than an MA that is a rolling average of the last 50 or 200 periods.

Knowing this, a lot of technical traders use this to their advantage. They, for instance, only look for stocks that have all the moving averages going in the same direction in order to confirm their bias. Hourlies, like you are asking about would be great for swing trading. If bullish perhaps you would not take any trades unless all three of the MA'a were currently moving up. Another method that is popular is simply to use crossovers and look for areas where the faster MA's cross either over or under the slower ones. A million backtesting strategies have been launched this way. Prodigio, anyone? The bottom line is, use it to your advantage either way.

Technifundamentalism VI – GDP, Rates of Growth

In pip academy this week, we will discuss the idea of economic as a measure of currency strength. The number one measure of growth for any country is its Gross Domestic Product or GDP. GDP can give a great snapshot of economic health though it is not a complete picture. We will look at the year of year GDP growth rates in the major economies to get the snap shot of which country is strongest and which is weakest. We will look at GDP growth percentages rather than dollars as this will put the smaller countries on a more level playing field compared to the large countries.

Below is a list of the major countries (based on currency trades) and their GDP estimated growth rates for 2010. Note a couple of key bits of information. Canada and the U.S. both have identical GDP year over year rates. The euro zone and Switzerland have identical GDP rates. This should not come as a surprise as Canada and the U.S. are the primary trade partners with each other as the euro zone and Switzerland. Their economies really depend on each other for growth. Also note how Germany and France are large enough and strong enough to bring up the average of the other euro zone countries (you could also look at is at the other euro zone countries are pulling Germany and France down).

If we combine two currencies with differing GDP rates such as the euro and the U.S. dollar, we can see there is a difference of 1.5% growth rate between the two. Though we can’t make large assumptions of how this will impact the currency exactly, we will definitely expect to see the euro significantly weaker through the year, which as of this point we have. We could do the same thing with the pound and the Canadian dollar. The Canadian dollar has a much stronger growth rate and we can assume a similar down trend for the GBP/CAD pair.

After establishing who is stronger and weaker, all that needs to be done is watch for timing and shifts in GDP quarter over quarter and month over month. As long as the skew favors one country over another, we could continue to add to these positions in the longer term trades with shorter term trade signals.

Fellow pairs trader who goes by "JCVictory" in our Thursday afternoon shows, recently shared some thinkscript with me that he's been using on pairs charts. I checked it out and was quite impressed. So much so that I have incorporated it into the pairs chart that is shown in the ShadowTraderPro Pairs Trader

The script plots the distance from the mean at open and at close and plots those as two different colored lines inside of a lower window, just like your correlation or ratio. Create a new study, using the following code:

declare lower;
input Length=10;

def SMA = Average(Close, Length) ;
plot plot1 = (Open - SMA);
plot plot2 = (Close - SMA);

plot1.SetDefaultColor(getcolor(5));
plot2.SetDefaultColor(getcolor(2));

Plot zeroline = 0;
ZeroLine.SetDefaultColor(GetColor(1));

That should give you something that looks like this:

We'll be featuring this in the ShadowTraderPro Pairs Trader from here on in and also discussing the proper use of this new indicator. Join us there...

Any questions, email us at pairstrader@shadowtrader.net where the TOS monkey is standing by eating bananas and getting ready to answer your pairs concerns.

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The Pairs Hour with Peter Reznicek is happening on Thursdays at 4:15pm EST in the ShadowTrader chatroom. Last week's show is archived here.

Each week Peter and his minions scour the markets to find the best equity and forex setups for the subscribers of the Swing Trader and FX Trader. Premium subscribers get 2-5 of these daily. Every weekend we present one trade idea from either the equity or the forex side here. Note: Free weekly trade ideas are strictly DIY (do it yourself!) and are not actively managed or updated once presented and may or may not be stocks that are currently in play in our newsletters. For a more "full service" feel, with real-time email alerts and updates, please check out the ShadowTraderPro Swing Trader and ShadowTraderPro FX Trader.

AOL, Inc - Long

Entry #1 - 19.65-19.45

Entry #2 - 21.48
Stop - 19.25
Target - 24.00

For the past two months, AOL has been in a down trend making lower highs and lower lows. The result of this price action is the descending wedge outlined by the orange trendlines on the chart above.

Price consolidation within the pattern is far enough along where planning for alternate entry points is reasonable. Deciding which entry to take will ultimately be decided by the strength of the market at the two points designated "Entry #1 and "Entry #2".

Entry #1 is our preferred point to initiate a long position as ShadowTrader believes that of the two choices it is actually the most conservative. This is true for two reasons. First, it is closer to the stop so our loss potential is smaller and secondly, the risk reward is greater than Entry #2 meaning that we have to take less risk for a greater gain.

Alternatively, if the market is strong early this coming week, AOL may break out of the descending wedge without coming back down to the point of Entry #1. In this case the second entry point just above the top of the wedge will come into play. An entry here offers a smaller risk reward ratio because the stop is placed at the same point for either entry. Therefore, we would classify Entry #2 as a more aggressive "quickie" type play.

One very important technical aspect of the descending wedge that might be overlooked by some traders is the pattern of volume during the wedge's formation. Volume should be high during the initial selloff within the pattern (magenta oval) but then decline throughout the rest of the wedge. When price breaks out of the top of the descending wedge, volume should surge.

For an average of 2-5 trade ideas like this every day along with daily market analysis and trading guidance, subscribe to the ShadowTraderPro Swing Trader for just $20.00 per month here.

New Educational Video - Don't know breadth from breath? Brad Augunas of ShadowTrader has just recorded "How to Interpret Market Internals, Part I. The video is available here.

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ShadowTraderPro Pairs Hour with Peter Reznicek - Thursdays, Peter Reznicek is hosting a 1 hour program on the basics of pairs trading. Tune into the ShadowTrader chatroom under the Support/Chat tab on your platform at 4:15pm EST.