or you can find the information on sites such as CBSmarketwatch.com or Yahoo.com. The image inFigure 3.1 displays the erratic volatility of CASS versus the more liquidMSFT.Second in our conversation about liquidity is float. Float is the totalamount of authorized and issued outstanding stock that is available totrade on a daily basis. Some of the stock that has been issued may not beavailable to trade, as corporate insiders cannot always sell when they arein the custody of a “holding period.” Thus, the float is simply all stock that
FIGURE 3.1 CASS versus Microsoft
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FIGURE 3.2 Yahoo.com—Float
is available in the current market to trade. Stocks with lower floats aremore dangerous, as they can move more quickly once a large order isplaced.Where to find float? Check www.yahoo.com as displayed in Figure 3.2.In regard to pairs trading, double-check both of the stocks to makesure that they have similar floats and average daily volumes. Even thoughtwo stocks can be highly correlated based on total price, they may still bevery dangerous if one has substantially more volatility risk than theother.
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GROWTH AND GROWTH RATIOSIn making you an efficient five-minute equity analyst, it is very importantthat we cover growth ratios. Growth numbers are very important in understanding where the stock is going, not where it currently is. After all, wealready know that!There are two types of growth that we will first examine—sales growthand income growth; both are fairly straightforward. We simply want to knowhow much a company is growing and how the individual company stacks up inits respective sector. If a company had incredible sales growth of 80 percent,but a negative income growth rate of 10 percent, clearly there is a red flag.If this scenario were true for a real stock, we could put an “x” in the “badincome growth” box of our fundamental checklist.Bottom line: If you are going to buy a stock, we want to see strongincome and sales growth numbers.Where to find this information? The crux of fundamental analysis is learning how to be able to do it yourself, which seems much more complicated thanit actually is. When looking for earnings growth, you can do a couple of different things. First, it is important to remember that using any Web site is verydangerous. The numbers are sporadically updated and can be hardly reliableat best. Even sites like Yahoo.com can take several days to get updated afterearnings reports. You can’t blame them; you just have to remember to questionevery number you come across if you are going to make sure the figures youare examining are accurate. So let’s figure out how to find these numbers foryourself. First, the numbers aren’t half as hard to find as you think they are, itjust takes a little research to unearth them. To find earnings growth, I wouldlike to use the following chart invented by Todd Shaver of BullMarket.com.Wal-MartQuarter
3Q02
3Q03
% Chg
RevenueNet IncomeEarnings per Share
$56B$1.8B$0.40
$63B$2.0B$0.46
⫹13⫹11⫹15
This chart is an excerpt from BullMarket.com. The amazing part is thatthe numbers are right in front of you in any earnings announcement. Look atthe following Wal-Mart press release that the numbers came from. This is theactual press release that the company put forth and can be found on anynews service, including Yahoo.com.
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Press ReleaseSource: Wal-Mart Stores, Inc.Wal-Mart Reports Record Sales and EarningsThursday November 13, 6:43 am ETBENTONVILLE, Ark., Nov. 13/PRNewswire-FirstCall/—Wal-MartStores, Inc. (NYSE: WMT - News) reported record earnings and salesfor the quarter ended October 31, 2003. Net sales were $62.5 billion, anincrease of 13.1 percent over the similar prior year quarter. Netincome from continuing operations for the quarter was $2.0 billion, a13.9 percent increase from the $1.8 billion in the similar prior yearquarter. Earnings per share from continuing operations were $0.46up from $0.40 per share in the same prior year quarter.Net sales for the nine months ended October 31, 2003, were $181.8billion, an increase of 11.4 percent over net sales of the similar prioryear period. Net income from continuing operations for the ninemonths increased 14.4 percent to a record $6.1 billion or $1.40 earnings per share, up from $5.4 billion or $1.21 earnings per share in thesame prior year period.On May 23, 2003, Wal-Mart Stores, Inc. completed the sale ofMcLane Company, Inc. (“McLane”), then a wholly-owned subsidiary,to Berkshire Hathaway Inc. McLane has been accounted for as a discontinued operation in this release.Lee Scott, President and CEO said, “The excellent results for thequarter reflect the continued efforts by our associates to serve our customers. Of particular note is the performance of our international andSAM’S CLUB teams.”You can see that all we did was take the net income, earnings per share(EPS), and revenue numbers; round them off; and stick them in the chart.Thus, we know immediately what the company is predicting without havingto wonder if one of the Web sites that we covet updated their numbers or not.The issue is that looking at items like the price-to-earnings (PE) ratiodivided by the annual EPS growth (PEG ratio), there is always a discrepancyof what numbers an analyst Web site is looking at. We can solve this problem by gathering the numbers ourselves. When looking for forward numberslike one-year earnings growth, use a Web site like Yahoo.com to get an ideaof the projected analyst estimates. The only question is whether the estimates are correct. However, using a site like Yahoo—and remembering thatthere can be errors from time to time—you at least have a reasonable baseto work from.Figure 3.3 shows the Analyst Estimates page on Yahoo.com.
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FIGURE 3.3 Yahoo.com—Earnings
Notice that there are three boxes highlighted: the average estimate forthe Current Year and Next Year, followed by Year Ago EPS. If we are lookingfor the previous year’s growth—and we trust the Web site’s updates—thenwe would simply subtract 1.81 from 2.05 and then divide the difference by1.81, which is 13 percent. Referencing the earnings numbers in Figure 3.3, sofar so good. For a forward-looking number, subtract 2.05 from 2.34 and thendivide the difference from 2.05, which is 14 percent. Thus, our conclusion isthat (based on Yahoo’s numbers) the company—estimate-wise—is expecting earnings growth of 14 percent. See how easy this is?
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The neat thing about growth numbers is that they can really giveinvestors a good snapshot of institutional thinking. Thus, if we look at twostocks and find considerably different growth numbers, we may infer thatthe two stocks will likely diverge from one another. In essence, what we aredoing is uncovering a fundamental reason behind our statistics before weever even begin to look at statistics. As an analogy, if you learn about seacurrents and wind patterns before you ever step foot on a sailboat, when youfinally do, you will be that much better of a sailor. Growth ratios are verysimilar to sea currents. Low income and sales growth compared to a stock’sbroader industry can drag the stock price out to sea. In other words, yourpair may have a hidden riptide that is pulling one side beneath water. If youunderstand how to read the tides, you will have a better chance of being ableto know when and where the currents begin to calm.
GROWTH, PE, AND THE PEG RATIOMany investors like to look at the PE ratio, though many analysts feel thatthis ratio is irrelevant, as it does not reflect the future earnings of the stock.And the future of the stock is what the market is “pricing in” or anticipatingwith each individual day’s trading action.The PE ratio is the current price of the stock divided by the current EPS.There are two conflicting schools of thought about where the ratio shouldbe. One school of thought feels that the ratio should be very close to 1, thusassuming that the current stock price is accurately trading near the presentearnings valuation. The second school believes that PE ratios should beabove 20 but below 40, to indicate that the stock is trading at a premium tothe current earnings valuation. Such is said to indicate that investors haveconfidence that the company will continue to grow in the future—whichbrings us back to that word again: growth.A newer version of the PE ratio is the PEG ratio, which equates to thePE ratio divided by annual EPS growth. The PEG ratio is said to be a moreaccurate indication of a stock’s perceived future value, unlike the simpler PEratio. However, because the growth figures used in PEG ratios are forecasts,they can be less accurate than the more current empirical accounting/earningsdata used in PE.
PE RatioGenerally, a PE ratio is calculated by using the last four quarters of earningsdata. Thus, similar to the previous example, we could calculate the PE ratio
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FIGURE 3.4 Yahoo—PE
by taking the full-year earnings numbers and dividing by the price of thestock. Let’s actually do one ourselves, just to make sure that we knowexactly what we are doing.In Figure 3.4 the most recent four quarters of earnings data are highlighted in a black box. Simply take all four numbers, add them up, and thendivide by the price of the stock, which is $55.52. The result is 29.91, orrounded it would equal 30. This number is known as the trailing PE, since ituses the most recent historical PE data.If we take a look at the Yahoo.com Key Statistics page (to obtain PE andPEG, please reference Microsoft example in Figure 3.2) where the PE and PEGratios are, we will see that our PE is very close to what Yahoo is calculating.
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However, our PE is a little off. The reason for this is that (in this case)Yahoo.com was not using the most current quarter. In the Yahoo.com earningsdata in Figure 3.4, the most recent quarter was July, and the company justreported new numbers that have not been updated. Thus, to get a more accurate number, we can drop the October 2002 earnings number and add in themost recent figure, which was 46 cents. So if we add the three numbers fromYahoo—0.57 ⫹ 0.42 ⫹ 0.52—and the most recent number (when this waswritten), 0.46, we get 1.97. Our price of $55.52 divided by 1.97 equals 28.18. Inthis case, Yahoo did a very good job of making sure the earnings number wasupdated for the trailing PE. However, in the Earnings History portion of thesite, the number was not updated at the same time.
PEG RatioTo calculate the PEG ratio, we would simply take the PE number and divideit by the annual earnings growth number. This is where the PEG can get a little shady. The problem is that for just about every PEG calculated, differentgrowth projection figures are used. While you may use annual EPS growthof one year, someone else may use five years. Or while you are using fullyear EPS number, someone else may be doing the next four quarters thatoverlap into a new year. Remember that anytime you are using projectednumbers, the data becomes less empirical and should be used as a guidingtool but not a grail of stock direction.Earlier in this chapter we calculated the annual EPS growth number forWal-Mart by using this year’s earnings number and the projected number forthe following year. We deduced that the company’s forward earnings growthwas expected to be 14 percent. Again, keep in mind that this is assumingYahoo’s numbers are correct. If we really wanted to be diligent, we couldread the company’s earnings report, find a statement of guidance, or listento the company conference call to get the actual EPS projection for nextyear. However, for the sake of example, we will just use the number onYahoo. To calculate the PEG, we would divide the PE ratio by the annualgrowth projection, which would be (rounded) 28 divided by 14, thus equaling 2. Our PEG is a little above the PEG of 1.8 listed on Yahoo; meaning thereis a discrepancy in growth numbers used. However, we are in the same ballpark, so we won’t worry too much about it.In general, a PEG ratio above 3.0 may indicate that a stock is overboughtand could cause investors to seek a pullback. Elevated PEG ratios might beindicating that a stock may pull back in order to return to a price relative tocurrent earnings projections. PEG ratios, like many other ratios, can varywidely from sector to sector, so it is very important to cross-reference other
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FIGURE 3.5 Yahoo.com PEG Comparison
companies in the same industry for a general idea of where the sectoraverage PEG ratio should be. Yahoo has a great PEG industry comparisonreference at the bottom of the Analyst Estimates page. Figure 3.5 shows justwhat I am talking about.P/E ratios and PEG ratios are to pairs trading as chalk is to a weightlifter.To the champion weightlifter, chalk is a tool that only assists in gripping(literally and figuratively) the situation at hand. However, true strengthcomes from within, from many years of hard work. Thus, P/E and PEG ratioshelp us confirm or negate our thoughts, but are not part of our inner fundamental strength.
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Understanding just how much cash a company has is vitally important toshort-term investing. Cash-poor companies will generally always receivenegative comments from analysts and find themselves out of favor withinvestors. Bottom line: Cash is the big kahuna!We will quickly examine a few ratios to understand how much cash acompany has. First, the current ratio equals current assets divided by current liabilities, and is meant to measure how effectively a company can measure its short-term obligations. It is often thought that the higher the currentratio, the less a company will have to worry about a cash crunch.Current assets are defined as balance sheet items that are cash, cashequivalents, inventory, marketable securities, prepaid expenses, and accountsreceivable. Current assets are generally all assets that can be converted intocash within one year.Current liabilities are simply all liabilities (similar to accounts payable)that are short-term debts due within one year.To find the current ratio, simply log on to Yahoo.com Finance and put ina ticker symbol. Then, click on “Profile” and voila—much of the company’sfinancial health is at your fingertips.The debt-to-equity ratio (EN 3.1) is vital in quickly understanding how acompany is leveraging itself. The debt-to-equity ratio is calculated as a company’s long-term debt divided by common shareholder equity, or equityavailable to common shareholders. Companies with higher debt-to-equityratios are thought to offer greater returns to investors, but are normallyriskier with larger liability obligations. The debt-to-equity ratio is also foundunder the Yahoo.com “profile” section.
TYING IT ALL TOGETHERMany analysts may argue that the information cited in this chapter barelyscratches the surface of a company’s true financial health, and for all intentsand purposes, I agree. However, for the average investor who does not havethe luxury of countless hours to fundamentally pick apart every company heor she is considering, the information given here is designed to at least finda few red flags.Let’s examine a hypothetical scenario. Imagine that two companies,Crasher Inc. and Bumper Inc., are both in the business of manufacturingairbags. Demand for airbags appears strong; thus, an investor may be thinking about buying both stocks. However, when investigating the two companies with simple fundamental analysis, the investor finds the informationshown in Figure 3.6.
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FIGURE 3.6 Crasher Inc. versus Bumper Inc.
Simple analysis discovered that Bumper Inc. has more cash to pay itsbills, is currently exceeding the broader sector in income growth, and hasless debt. What’s more, even with lower sales growth, Bumper Inc. hasgreater income growth potential, which may allude to a more cost-efficientmanufacturing process. Overall, the short-term trader not taking a long-termposition in the stock may infer that the more soluble company (Bumper Inc.)embodies less risk during a near-term trade. Of course, this would alsodepend on both stock prices, for if Bumper Inc. was trading at $100 per sharewhile Crasher Inc. had a present price of $10 per share, the conclusion mightbe different! Again, the previous analysis leaves much to be desired. However, for the investor who does not have the luxury of countless hours dedicated to research, the aforementioned fundamental analysis may at leastoffer some assistance in understanding equities.You may now see that in the case of Crasher Inc. and Bumper Inc., if thestocks were presently trading at the same price, we may possibly infer thatdivergence is looming. Bumper Inc. might ascend and Crasher Inc. mightdecline. In short, by understanding fundamental analysis, we may be able topredict some of our statistics before they ever begin to unfold.
CHAPTER 4
TechnicalAnalysisCandlestick Charting, HammerBottoms and Hangman Tops,Doji Star, Shooting Stars,Engulfing Patterns, Supportand Resistance, Trend Lines,Moving Averages
o understand pairs, we must also understand technical analysis sothat we can make more informed decisions when considering ourpositions. Technical analysis is simply the art of evaluating thehistorical price movements of a stock in an attempt to find information thatmay discern possible future direction. Usually, this is in the form of readingcharts, coupled with assorted indicators such as: moving averages, stochastics, relative strength, and/or any other “indicator” that may map a stock’shistorical trading activity. Technical analysis can be both up to the moment,in “real time,” or on a historical basis. However, I would like to point out thateven real-time data is an event that has already occurred. Thus, all technicalanalysis is made up of lagging indicators, which presume future movements.For the swing trader, end-of-day (EOD) data will suffice to do proper analysis. End-of-day data is simply the open, close, high, and low of a stock’s tradingactivity after any given trading day. Real-time data is generally needed onlyfor day traders, institutional traders, or swing traders overly concerned abouttiming entries (or exits) in an effort to minimize slippage. (EN 4.1)Again, it is important to remember that all technical analysis consists oflagging indicators because the data used denotes events that have alreadyoccurred. In short, technical analysis trys to map individual stocks, sectors,and indices using history as a potential guide to the future. Techniciansattempt to find measurable patterns or “indicators,” which may allude topossible future trading activity. In essence, it is said that technical analysis
T
21
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is the science of “self-fulfilling prophecies.” By this I mean that technicalanalysis generally works only if many, many people follow similar indicators. As an analogy, when we go to buy tickets for an event, generally anorderly line forms as people wait their turn to get to the ticket window. Theline itself is not mandated, but is honored by many people who are following the same rule of order. Technical analysis allows individuals to findbenchmark rules of order on which to base market-oriented thought.Fundamental analysts often scoff at technical analysis, saying that it hasno true relevance to a stock’s underlying value. While this may be true at theheart of the issue, fundamentalists seem all too quick to forget one important facet of technical analysis: If you have a stock that immediately beginsto sell off and breaks critical support (explained later), one may assume thatobviously someone’s opinion of the stock has changed. Perhaps the alteredopinion is that of a fundamental analyst who has sent out a research reportdowngrading the stock. The price activity of the stock recorded in technicalanalysis then simply alerts the average investor to a possible fundamentalmindset adjustment, flagged by the technical breakdown observed on theactual chart. Regardless, the price activity witnessed in technical analysis is anextension of all the events surrounding a stock, including fundamentalanalysis, institutional order flow, earnings, rumors, and news. In a fewwords, the entire reason we are incorporating technical analysis in our pairsdiscussion is so that we may have an “alert” system to ideological or fundamental changes within a company. Technical analysis then becomes ourroad map to the market. In the chart in Figure 4.1, you will see a substantial
FIGURE 4.1 Technical Analysis Chart
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breakdown in Microsoft. The actual sell-off was due to investor worriesabout Windows’ security. In late October, there were many viruses splattering networks, all because of loopholes in the Windows code. ThoughMicrosoft quickly developed patches to solve the problem, there was stillselling in the stock. Even if you weren’t in the real world and did not knowof the viruses/worms, the chart would have alerted you that something bigwas happening. Thus, technical analysis is our eyes and ears to the market.
CANDLESTICK CHARTINGCandlestick charting is a method of charting dating back to the 1600s, whenJapanese farmers would attempt to map the price action of rice futures.(EN 4.2) Each candlestick is comprised of four basic parts: open, close, high,and low. Each candlestick contains a “real body,” which is the distancebetween the open and closing prices for the stock during the period covered.Although there are intraday candlesticks, we will use only daily candlesticksin this chapter (i.e., each candle equals a full day of trading activity). Eachcandle may also have a “wick,” which is a line above and/or below the realbody denoting the day’s trading action higher than the open, or lower thanthe close. A stock can open at $20, trade as high as $21 during the middle ofthe day, then close at $19.50. This candle would look like Figure 4.2.Each candle will either be green or red. Green candles indicate that theclose ended higher than the open (the stock closed positive) and vice versafor red.There are many different “patterns” of candlesticks, which are said to tellof potential future trading action. We will go over only a few basic patternsand then provide some additional resources to find more information.As you read this chapter, please keep in mind that it may generally be agood idea to only use our candlestick knowledge on individual chartsinstead of the differential or ratio (explained later) for our pair. By beingable to read the individual charts, we may again find ourselves ahead of ourstatistics as we potentially “predict” a move before it occurs.
Hammer Bottoms and Hangman TopsIn general, a hammer bottom is a candlestick that is at the bottom of adescending chart and denotes a potential reversal pattern. The hammer bottom consists of a small real body with little or no wick on top. The hammerhas a very long tail underneath the real body, generally at least two times thereal body. The greater the tail underneath the real body, the better the
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FIGURE 4.2 Candlestick Example
candlestick formation. It is also important to note that candlestick patternsusually require confirmation to ensure that the day’s trading was not a “headfake.” (By confirmation I mean that the day following the hammer candlestick should have a close above the previous day’s high, thus indicating ahigher high in the relative range.) The hammer bottom combined with a second day of confirmation usually indicates that bears tried to take the bottomout of the stock but ran out of gas, and bulls recovered with strength. Theresulting conclusion is that a substantial portion of weaker bulls werefinally forced out of the stock and savvy bears realized that it is time tocover short positions. Thus, a potential reversal could be looming. Technicians often like to see a large volume spike on the actual hammer day,which is said to possibly confirm that the remaining bulk of frail buyers, orshorts, have exited the stock. Figure 4.3 displays a hammer bottom and thefollowing day’s confirmation.The hangman top is exactly the same thing as a hammer bottom, but itis on the top of an ascending move. Much like a hammer bottom, a hangmantop also has the tail underneath the candle. A hangman top with a large tailindicates that bulls may be growing nervous and could begin dumping their
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FIGURE 4.3 Hammer Bottom
positions. The close at the top of the tail signifies that even though bullswere able to hold ground, there are now many skeptical holders ready todrop the stock at the first sign of trouble. As with hammer bottoms, savvytechnical analysts may also look for confirmation of a lower low in thesubsequent trading day.
Doji StarA doji star can be at either the top or bottom of a chart and may indicate thata stock is generally planning on making a new move. The doji is a day of consolidation, wherein a stock generally has a range above and below the openand close. Doji stars are characterized by tails on both the top and bottomof the real body. Consolidation days (otherwise known as doji stars, like theone in Figure 4.4) can produce intraday ascending and descending trendlines that day traders watch for potential breakouts.
Shooting StarsShooting stars are found on the top of a trend. The stock may trade aboveand below the open, but generally closes relatively near where the day commenced trading. The shooting star is similar to a doji, but with the upperwick resting at least two times above the real body. The theory behind ashooting star is that bulls gapped the stock up and tried to run it higher, but
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FIGURE 4.4 Doji Star
failed to hang onto gains. Then, if the following day closes below the shooting star’s low, the pattern is said to have confirmation of bulls’ lack of buying conviction. Figures 4.5 and 4.6 show two examples of shooting stars.
Engulfing PatternsAn engulfing pattern is a candle that literally engulfs the entire day’s previous candle. A bullish engulfing candle opens lower than the previous dayand then proceeds to close higher. The pattern is usually at the bottom of adescending move and can mean that traders are heavily covering shorts inanticipation of a possible ascending move. The bearish engulfing pattern isvery similar but is on the top of an ascending trend and has an open andclose at more extreme points than the previous session. Engulfing patternsare also called “outside” days by Western chartists, but generally mean thesame thing. Much like all charting, engulfing patterns are best used whenconfirmed with the following day’s trading activity. The chart in Figure 4.7displays both bullish and bearish engulfing patterns.Now that we have covered a few candlestick patterns, let’s see how this knowledge can apply to pairs trading. If our statistics are indicatingthat we should buy Stock A and sell short Stock B, we may want to checkother information available, just to see whether our statistics agree withtechnical analysis. Then, by examining the charts, we may see that Stock Ahas just formed a hammer bottom (with confirmation), while Stock B has
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FIGURE 4.5 Shooting Star 1
FIGURE 4.6 Shooting Star 2
created a shooting star (with confirmation), and we may feel more confident about entering our pair. The key to being an effective directional orpairs trader is to get as many different indicators on our side as we can. Ifour statistics coincide with the fundamentals and the technical charts, wehave more favorable aspects of the trade working for us rather thanagainst us.
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FIGURE 4.7 Bullish and Bearish Engulfing Patterns
SUPPORT AND RESISTANCEWhile support and resistance are two very easy parts of technical analysis tograsp, they are also quite effective in predicting key levels of price action onany given chart. Support is simply the horizontal line among a series of similar points in a chart’s history, drawn underneath the stock’s current price.Horizontal support can date back anywhere from two ticks to an entirecentury, so long as there are multiple points that match up to form the support line. Support is said to be at levels below the current price of a stock,where bulls may attempt to hold the stock up, should it decline. Resistanceis the same thing as support, with the exception that it is above the stock’scurrent price. Resistance is a level where bears will try to keep the stockunder, should the stock ascend. As a picture tells a thousand words, Figure 4.8displays how support and resistance are drawn on a chart.
TREND LINESTrend lines are another simple but crucial part of technical analysis and areoften overlooked for more complicated indicators. However, at times technical analysis can be most effective by keeping things simple, rather than
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FIGURE 4.8 Support and Resistance
piling on tons and tons of confusing indicators. Why? In the industry this iscalled analysis paralysis, wherein one compiles too much information andis therefore not able to make any decisions at all. Basically, with too muchinformation, one can become a “deer in headlights.” In fact, sometimes themost effective information is the most obvious information that has beenstaring us right in the eyes the whole time!Trend lines are just that: They are readily apparent—angled—supportand resistance lines that denote the direction of a stock’s trend. There aretwo types of trends: up and down. Ha! You have to be laughing to yourself,saying, “That was the most profound piece of trading information I have everrun across!” Okay, humor aside, it really is very important to understand thesignificance of trend lines. While the two directions I have just indicatedseem incredibly simple, they are amazingly effective in predicting short - andlong-term price movements.Succinctly, an ascending trend line is drawn by connecting the lowpoints of two or more candlesticks in a straight but elevating line. The linemust be straight, not curved. The elevating line on the bottom of the upwardmoving candlesticks (positive and negative days included) is known asascending support. A descending trend line is exactly the same but is drawnusing the highs of two or more days and slopes downward while producing
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FIGURE 4.9 Ascending Support and Descending Resistance
lower lows. The downward-slanting line on the top of the falling candles isotherwise known as descending resistance.If a stock has been moving upward for several sessions and ascendingsupport is violated, the most obvious presumption is that (at least during thenear term) the direction of the stock will turn. When ascending support isviolated, a trader may be hoping the stock will pull back, while investorstake profits off the table and wait for a more ideal long reentry point. However, if the stock violates ascending and horizontal support, more aggressive investors might attempt to short the stock in anticipation of a largerbreakdown (see Figure 4.9).Simply trading trend lines coupled with support and resistance is not recommended. Understanding this area of technical analysis certainly helpsincrease an investor’s repertoire of analysis tools to make more informed andeducated decisions, but is not enough information to base a trading strategy on.However, I cannot pound the table enough for the average investor andeven for the “master” technician to rethink the vitality and importance oftrend lines!
MOVING AVERAGESA simple moving average (SMA) is the average of a security’s price over aspecified period