The truth about stock cycle analysis: Why do monthly and quarterly charts often "deceive" us?

Many investors have heard of using monthly and quarterly lines to determine buy and sell timing, but few truly know how to use these indicators effectively. Many only see the surface and fail to realize that these indicators, based on historical data, have inherent limitations that cannot be overcome. Today, we will delve into the system of monthly and quarterly lines to reveal their true nature.

What Are Monthly and Quarterly Lines? Understand the Calculation Logic First

In technical analysis, the weekly, monthly, and quarterly lines are actually different time versions of the same thing—Moving Averages. Their calculation method is very simple: sum the closing prices over a certain period and divide by the number of days to get an average.

Taking NVIDIA (NVDA) stock price as an example, the closing prices over the last 5 trading days are 925.61, 950.02, 942.89, 914.35, 903.72. Adding these up and dividing by 5 yields an average of 927.318. Plotting this average daily on a candlestick chart and connecting the points forms what is called the “weekly line.”

Different traders choose different periods based on their habits. The most common are:

Essentially, these visualize the average cost paid by investors who bought the stock over different past periods. If the stock price is above these lines, it indicates that those who bought during that period are currently profitable; if below, they are at a loss. It sounds reasonable, right? But this is where the problem lies.

The True Face of Golden Cross and Death Cross

Many have heard of the Golden Cross (buy signal) and Death Cross (sell signal). Simply put, a Golden Cross occurs when a short-term moving average crosses above a long-term moving average; a Death Cross occurs when it crosses below.

In NVIDIA’s historical trend, such crossovers have indeed appeared. When a Golden Cross occurs, it usually indicates that short-term buyers are stronger, and most market participants are in profit, which is interpreted as a bullish signal; the opposite is true for a Death Cross, seen as a bearish signal.

But the problem is: these signals are all hindsight. By the time the averages cross, the trend has already started. Seeing a Golden Cross and buying may mean you’ve already missed the best entry point.

Four Patterns of Monthly and Quarterly Line Arrangements, Each with Its Own Insights

When multiple lines of different periods are arranged together, investors often judge market trends based on their configuration:

Bullish Arrangement — All periods’ lines are rising, from short to long, in order from top to bottom. This usually indicates that the stock has completed consolidation and may be entering an upward phase, representing a relatively safe buying zone.

Bearish Arrangement — All lines are falling, from top to bottom from long to short. This suggests a sustained downtrend, with a higher probability of further decline, and may be a signal to consider exiting.

Sideways Consolidation — All moving averages are flat, indicating a stalemate between bulls and bears. At this point, it’s best to wait for new variables and avoid rash actions.

Tangled Consolidation — The lines are intertwined, reflecting serious disagreement among market participants. Waiting for a breakout or breakthrough news is advisable.

While these patterns seem clear, in practice, they often give investors false signals.

The Fatal Flaws of Monthly and Quarterly Lines: Lag and Noise

Whether it’s the monthly or quarterly line, there are two unavoidable issues:

First flaw: Lagging — Since these indicators are based on past data, they inherently lag behind actual market movements. When a trend reverses, the indicator’s reaction is delayed. By the time you see the average line change direction, the market has already turned. This often causes you to miss the optimal entry or exit points.

Second flaw: Noise susceptibility — When a stock experiences sharp short-term fluctuations due to unexpected events (like earnings reports, regulatory changes, etc.), these movements can leave “false signals” on the averages. Investors may misjudge the trend and make incorrect trading decisions. Especially during major data releases, monthly and quarterly lines can produce confusing signals.

These two flaws mean that monthly and quarterly lines can never be used as sole decision-making tools. They should only serve as auxiliary references in conjunction with other analysis methods.

How to Properly Use Monthly and Quarterly Lines: Recognize Their Limitations

Given these issues, how should they be used correctly?

First, recognize that moving averages merely reflect past prices and cannot predict the future. Treating them as infallible forecasting tools will only lead to disappointment.

Second, when using monthly and quarterly lines, combine them with fundamental analysis. A perfect bullish arrangement combined with poor corporate performance will still likely decline. Conversely, even a bearish arrangement can rebound due to strong fundamentals.

Third, be aware of the time cost associated with different periods. The quarterly line represents the average purchase cost over a quarter. If the stock price falls below the quarterly line, it indicates most buyers in that period are at a loss, but this does not mean the stock won’t continue to fall, as markets often create panic selling through sharp declines.

Finally, during sudden negative or positive news, do not overly rely on monthly and quarterly lines. At such times, market logic can be rewritten by short-term emotions, and any indicator based on historical averages may become invalid.

There are many technical analysis tools; monthly and quarterly lines are just one of them. True investment decisions should be based on a multi-dimensional, multi-period, multi-indicator comprehensive analysis, rather than being driven solely by a single average line.