Technical Studies: Moving Average Envelope (MAE)

The Moving Average Envelope is a lagging upper chart indicator that plots three lines:

• a Simple Moving Average (SMA) of the security's price
• an upper band that sits at a fixed percentage above the SMA
• a lower band that sits at a fixed percentage below the SMA

The Deviance, which is the fixed percentage the upper and lower bands sit in relation to the SMA, and the SMA are both customizable. The default SMA is nine-periods (minutes/hours/days/weeks/months) while the default Deviance is 2%.

Interpretation: Some technical analysts advocate customizing the SMA and Deviance to the price volatility so that, say, 90% of price activity shown takes place within the bands. The goal is to fit either the top band or bottom band to the highs or lows of the stock's movement in order to set target prices (exit and entry points) for a trade. As volatility expands or decreases over time, the analyst will adjust the Deviance higher or lower.

When the security's price touches the upper band and turns down, the security might be at an overbought level. Conversely, when the security's price touches the lower band and turns up, the security might be at an oversold level.

As well, price moves that pierce the bands may imply a continuation of a current uptrend or downtrend. Trend reversals, on the other hand, may be signaled when bottoms and tops made outside the bands are followed by bottoms and tops made inside the bands. Some analysts believe that, when a stock is moving sideways in a trading range, a price move originating at one band will tend to extend to the other band. However, when the security's price is in a definite uptrend, the exit point for a long trade may occur when the price crosses below the SMA; however, in a downtrend, the exit point for a short trade may occur when the price crosses above the SMA.