Today’s release of the Chicago Fed National Activity Index is off, to -0.18. Like most traders, I follow this stuff on Econoday. I was surprised to read that the three month average is up, despite a down reading.
Stepping back, the trend for this index, despite the decline in October, took a turn higher with the 3-month index up …
How is it possible that the three month average is up, when the latest reading is down? This is a problem with simple moving averages. They are susceptible to odd swings as old values expire. In this case, even though the October reading was bad, the average improves because a worse reading from July was dropped.
Simple moving averages are fine for TA, but if you’re only going three periods back and trying to discern the economy’s condition, you might be better off using Wilder’s smoothing.
Wilder, very sensibly, reckoned that if you want a three period average, one third of it should be the current value, but instead of one third each for the two prior values, he added 2/3 of the previous average. This includes, diminishing over time, the information from all previous values.See, no weird swings, and down readings move the average down. If you’re following along on Econoday, my SMA differs from theirs because I went back and used the monthly revised figures. Here is the same data in a chart: