Moving Averages

Moving averages (MAs) are among the oldest, simplest, and most useful tools for traders. A moving average is simply an average of a series of numbers.

What Data to Average?

Traders who rely on daily and weekly charts usually apply moving averages to closing prices. Day-traders are better off averaging not closing prices, but an average price of each bar. For example, they can average Open + High + Low +Close of each bar, divided by four, or High + Low + Close divided by three.

How Long a Moving Average?

The wider the time window, the smoother is a moving average. That benefit has a cost. The longer a moving average, the slower it responds to trend changes. The shorter a moving average, the better it tracks prices, but the more subject it is to whipsaws, temporary deviations from the main trend. To analyze weekly charts, start with a 26-week moving average, representing half a years worth of data. On the daily charts, start with a 22-day MA , reflecting roughly the number of trading days in a month, and see whether you can make it shorter. Many technical analysts use moving averages as support and resistance. If the stock price rises above the moving average, this is seen as a bullish sign. Conversely, if the stock price drops below the moving average, this is seen as bearish and is a signal to sell . In particular, many institutional investors use the 200-day MA as support and resistance. For example, if the stock price is trading below the 200-day MA, this is a signal to sell. If the stock price is trading above the 200-day MA, this is a signal to buy. Shortterm traders tend to use the 40- or 50-day MA to determine support and resistance levels.

The usual moving average methods are based on penetrations of the moving average. Thus, if a stock's price rises above its 10 week moving average, a buy signal is given and when it falls below a 10 week moving average, a sell signal is produced.

What Type of Moving Average?

A simple MA adds up prices in its time window and divides the sum by the width of that window. Thus, in a 20 day average we add up all values for the last 20 days and divide by 20. To make this a "moving average" we wait until tomorrow's close, add that figure to our sum and subtract the figure from 21 days ago and divide by twenty. The trouble with a simple MA is that each price affects it twicewhen it comes in and when it drops out. A high new value pushes up the moving average, giving a buy signal. This is good; we want our MAs to respond to new prices. The trouble is that 10 days later, when that high number drops from the window, the MA also drops, giving a sell signal. This is ridiculous because if we shorten a simple MA by one day, well get that sell signal a day sooner, and if we lengthen it by a day, well get it a day later.! An exponential moving average (EMA) overcomes this problem. It reacts only to incoming prices, to which it assigns more weight. It does not drop old prices from its time window, but slowly squeezes them out with the passage of time. EMA = P (today) * K + EMA (yesterday) * (1- K) where K = 2/(N+1) , and N = the number of days in the EMA (selected by trader) P(today) = todays price EMA(yesterday) = the EMA of yesterday If we decide to look at a 22-bar EMA of closing prices, K = 2/(22+1) = 2/23 = 0.087. Multiply the latest closing price by that figure, multiply yesterdays EMA by 0.913 i.e., (1 0.087), add the two, and arrive at todays EMA. Begin by calculating a 22-bar simple MA and then switch to the EMA. Most indicators require you to have one or two months of data before they start giving meaningful signals.

Trading Signals
When a moving average points up, trade that market from the long side. When a moving average points down, trade that market from the short side. When an EMA starts jerking up and down, it indicates a vacillating, trendless market; A moving average acts as a trend line or band of resistance and support to the raw data. When the raw data rises above the moving average, it continues moving up. When the raw data falls below the moving average, the up trend has been reversed and the raw data moves sharply lower. EMA works in all timeframes but shines on the weeklies. Use a system of dual moving averages to identify trends and enter positions. : You may select an EMA that tracks your market well, but it moves so explosively that prices never react back to that EMA, denying you a chance to put on a value trade. To solve this problem, you can add a second moving average. Use the longer EMA to indicate the trend, and the shorter to find entry points. Suppose you find that a 22-day EMA does a good job identifying trends in your market. Plot it, but then divide its length in half and plot an 11-day EMA on the same screen in a different color. Continue to use the 22-day EMA to identify bull and bear moves, but use pullbacks to the shorter EMA to identify entry points.

Chart 2

Keep in mind that you should not base your trading decisions solely on moving averages (or any other technical indicator), but the MA does give you an idea of the strength and direction of the stock trend. Figure 12-1 shows a stock chart with two moving averagesthe 50-day MA and the 200-day MA.

In Figure 12-1, for much of the period shown, Caterpillar remained well below its 50-day and 200-day MA. Near the end of August, it bumped up against the 50-day MA before reversing direction. At the end of October, the stock broke through the 50-day MA on rising volume, a very positive sign. By the end of November, it also broke through the 200-day MA. From a short-term technical perspective, this stock should be held until there are signs that it has run out of steam.

Figure 12-1 Moving averages

Figure 5.5 Moving AverageMajor Trend

EMA works in all timeframes but shines on the weeklies, where it helps you stay with the major trend no matter how hard it tries to shake you off. This 26-week EMA has tracked the entire glorious bull market in YHOO, from its obscure beginnings, to the breathtaking $250 peak, and back into the doghouse. If you wake up in the morning, look at the weekly EMA, and trade in its direction, you will not be in too bad a shape!

Figure 5.6 Value Trades and Greater Fool Theory Trades

When you buy near a rising moving average, you buy value (points D and F).Waiting for such opportunities require patience, but it is infinitely safer than chasing rallies. Those who buy high above the EMA pay above value, hoping to meet a greater fool who will pay them even more. Anxious traders who buy near the tops (points C and E) get shaken out, or else they tensely wait to get out at breakeven. Many stocks and futures have typical behavior patterns, and you should try to identify them and use them. At the time of this writing, EBAY likes to have kangaroo tails (A, B, C, and E). The C tail had the most classical shape, but others worked also. Knowing what pattern to expect helps you recognize it a little sooner when it appears. At the right edge of the chart the EMA has stopped rising and begun to flutter. The bull move is over. If you are a trend trader, it is time to move over to other, trending stocks. Keep an eye on EBAY, waiting for a new trend to emerge. The same rules apply to shorting in downtrends. When you go short on a rally to the EMA, you are selling valuebefore the market reverses and starts destroying value again. A greater fool theorist shorts far below the EMAthe farther away, the greater the fool.

Bollinger Bands / Channels: Another Measure of Whether Stocks Are Overbought or Oversold
Helps traders identify whether a stock is overbought or oversold. A channel, or an envelope, consists of two lines, one above and one below a moving average. There are two main types of channels: straight envelopes and standard deviation channels, also known as Bollinger bands. In Bollinger bands the spread between the upper and lower lines keeps changing in response to volatility. When volatility rises, Bollinger bands spread wide, but when markets become sleepy, those bands start squeezing the moving average. The upper channel line reflects the power of bulls to push prices above the average consensus of value. The lower channel line reflects the power of bears to push prices below the average consensus of value. Upper channel line = EMA + EMA Channel coefficient Lower channel line = EMA - EMA Channel coefficient A well-drawn channel contains the bulk of prices, with only a few extremes poking out. Adjust the coefficient until the channel contains approximately 95 percent of all prices for the past several months. Mathematicians call this the second standard deviation channel. Most software packages make this adjustment very easy. Find proper channel coefficients for any market by trial and error. Keep adjusting them until the channel holds approximately 95% of all data, with only the highest tops and the lowest bottoms sticking out. Drawing a channel is like trying on a shirt. Choose the size in which the entire body fits comfortably, with only the wrists and the neck poking out. When we are bullish, we want to buy value near the rising EMA and take profits when the market becomes overvaluedat or above the upper channel line. When bearish, we want to go short near the falling EMA and cover when the market becomes undervaluedat or below the lower channel line. First, if the two outer bands move so close together that they are almost touching (narrow), this is a signal that there could be a sudden move in the stock price, either up or down.

Second, if the price indicator is pushed well outside the upper or lower band, this means that there is strong buying or selling activity. Many times, a stock will ride the upper or lower band for minutes or hours and then cross through. Often, if the price indicator begins in one band, it will cross to the other band. This tells you that in the next few minutes, or perhaps hours, the stock price will reverse direction. The good news is that in the hand of an expert, technical indicators like Bollinger bands are extremely useful. The bad news is that the indicators change so quickly that they are useful primarily to shortterm traders.

Figure 12-4 Bollinger bands

Figure 5.7 Channels for Profit Taking

When the EMA rises, it identifies an uptrend. It is a good idea to buy near that EMA or slightly higher or lower, depending on the stocks recent behavior. At point A, EMA stands at 35, while the low point of the bar reaches 33a 2-point downside penetration. At point C, the price low penetrates the EMA by 1 point, at D by 2.25, at F by 4, at point H by 0.75, and at J by 4. The place to sell stocks purchased near the EMA is at the upper channel line. Buying value near the EMA and taking profits above value, near the upper channel line, is safer and more reliable. Stock bought at A can be sold at B, bought again at C or D and sold at E, and so on. A trader can grade his performance, based on the percentage of the channel he takes in profits on any given trade. For example, at the right edge of the chart, the upper channel line stands at 97 and the lower at 69, making the channel 28 points high. An A trader should get the minimum of 30% or 8.4 points out of the next trade, a B trader 20% or 5.6 points, and a C trader 10% or 2.8 points. At the right edge of the chart, prices are hitting the upper channel line. It is time to take profits on stocks purchased in area J, near the EMA, and wait for a pullback.

If you buy near a rising moving average, take profits in the vicinity of the upper channel line. If you sell short near a falling moving average, cover in the vicinity of the lower channel line. Channels catch swings above and below value but not major trends. Those swings can be very rewarding. Prices occasionally take off on wild runaway trends. They break out of a channel and stay out for a long time, without pulling back to their EMA. When you recognize such a powerful move, you have a choice: stand aside or switch to a system for trading impulse moves. Professional traders, once they find a technique that works for them, tend to stay with it. If a moving average is essentially flat, go long at the lower channel line, sell short at the upper channel line, and take profits when prices return to their moving average. The upper channel line marks an overbought zone. If the market is relatively flat on long-term charts, rallies to the upper channel line then provide shorting opportunities, whereas declines to the lower channel line provide buying opportunities. How to Grade Your Performance Channels help us grade the quality of our trades. When you enter a trade, measure the height of the channel from the upper to the lower line. If you use daily charts to find trades, measure the daily channel; if you use a 10-minute chart, measure the channel on a 10- minute chart; and so on. When you exit that trade, calculate the number of points youve taken as a percentage of the channel. That is your performance grade. If a stock is trading at 80 with a 10% channel, then the upper channel line is at 88 and the lower at 72. Suppose you buy that stock at 80 and sell it at 84. If you take 4 points out of the 16-point channel, then your grade is 416 or 25%. Where does that place you on the rating curve? Any trade where you take 30% or more out of a channel earns you an A. If you take between 20 and 30%, your grade is a solid B. If you grab between 10 and 20%, you earn a C. You get a D by taking less than 10% out of a channel or running a loss. Your first essential record is a spreadsheet of all your trades. Add two columns to your spreadsheet. Use the first to record the height of the channel when you enter the trade. Use the second to calculate what percentage of that channel youve grabbed exiting that trade. Keep

monitoring your grades to see whether your performance is improving or deteriorating, steady or erratic.

What Markets to Trade? Channels can help us decide which stocks or futures to trade and which to leave alone. A stock may have great fundamentals or beautiful technical signals, but measure its channel before you put on a trade. Itll show you whether the swings are wide enough to be worth trading. You may look at a volatile stock whose channel height is 30 points. If you are an A trader, you should be able to get 30%, or 9 points, out of a trade. That will be more than enough to pay commissions, cover slippage, and leave you with profits. On the other hand, if you look at an inexpensive stock whose channel is only 5 points high, then an A trader would be shooting for a paltry 1.5-point gain. That would leave you with next to nothing after commissions and slippageleave that stock alone, no matter how good it looks. What if your performance slips a bit or the market throws you a curve? What if you earn only a C and take only 10% out of a channel? The first stock, with its 30-point channel, will return 3 points profitenough to make some money after expenses. The stock with a 5-point channel will return only half a point, and commissions and slippage may push you into negative territory! Beginners are often seduced by low-priced stocks with strong technical patterns. They cannot understand why they keep losing money. When there is no room for the stock to swing, a trader cant win.Beginning traders should leave alone any stock whose channel is narrower than 10 points, meaning that a C trader can take one point out of it. Lowpriced stocks with slender channels can make good investments but not trades.

Volume: An Underestimated but Powerful Indicator

Volume shows how many shares changed hands during a given period. By studying the volume of shares being traded, you can obtain clues as to whether a stock is moving because of true buying or selling interest or other factors that could influence the direction of the stock. Sometimes you will hear people on Wall Street talk about a liquid market. This is another way of saying that there is a lot of volume in the market or in an individual stock. The more liquid a stock is, the easier it is to get into and out of it. That is why you want a lot of liquidity in the market.

Advanced Technical Indicators and Oscillators Now Im going to show you a couple of neat little tools, called technical indicators and oscillators that short-term traders use before they enter or exit a trade.

METHOD 1: On Balance Volume Formula

In order to perform some of the calculations in this book, the daily opening stock prices are needed. If the opening prices are not readily available to you it can be substituted using yesterday's close in place of the open in the formula. The amount of accumulation is determined by taking the difference from the previous close to today's high. If yesterday's close is higher than today's high the first buying unit is zero. Next take the difference from today's low to today's close, the other unit of buying. B1 = Todays High Todays Open (B1 = 0, if TO > TH) B2 = Todays Close Todays Low TB = B1 + B2 Take the difference from yesterday's close to today's low and today's high to today's close. S1 = Todays Open Todays Low (S1 = 0, if YC < TL) S2 = Todays High Todays Close TS = S1 + S2 Add the total buying figure and total selling figure, to get total transaction figure TT = TB + TS

Divide the buying figure by the total figure and you have the percent of buying for the day. %B = TB/TS %B * Volume = OBV OBV basically measures how much money is flowing into or out of a security. If the OBV line is dropping, it tells you that people are selling. If the OBV line is rising, it tells you that people are buying.

METHOD 2: To construct the OBV indicator, a running total of volume is kept.

Assume we started with a stock that traded 10, 00,000 shares on day. This is a neutral starting point, as we have to start somewhere. If the stock closes higher the next day and 7, 50,000 shares are traded, day 2s volume figure is added to the first day and assigned a positive number, as our running total is so far a positive number, with OBV on day 2 at +17,50,000. OBV would be a negative number, if our example stock closed lower on day 2, on 15, 00,000 shares: OBV would be 5, 00,000. On day 3 the stock closes lower on 5, 00,000 shares and we subtract that days volume from our cumulative OBV total: On day 3, OBV is +12, 50,000. When the stock is unchanged in price on day 4, we leave OBV unchanged at +1,250,000. If we graph the points, the resulting line will start moving upward or downward following the direction of the price trend of the stock for which OBV is being calculated. An example is noted in Figure 4.19 of an upturn in OBV preceding a reversal of a down trend in VeriSign during the period shown. To date on this chart, the up trend looks to be a secondary up trend, within a primary down trend. The OBV/price divergence information could have prompted a profitable trade in the stock.

It could also be the beginning of a reversal in the primary trend but, for the price history shown, it is too soon to predict that.

However, we are primarily concerned with the direction of OBV and whether the line is moving up or down. If the direction is up, the OBV line is bullish, as there is more volume on up days than on days when the stock price is down. A falling on balance volume line is bearish, as more stock is being traded on down days than on up days. If both price and OBV are moving up together, it is a bullish sign portending higher prices. If both price and OBV are moving down together, this is a bearish indication for still lower prices ahead. However, if prices move higher during a period of time when OBV lags or moves lower, this is a bearish divergence indicating diminishing buying activity and warns of a possible top or trend reversal.

An example of OBV is provided in Figure 4.19, which shows a daily chart of VeriSign Inc. (VRSN), with its corresponding on balance volume indicator.

An opposite, bullish divergence occurs in a down trend if OBV starts trending higherthe sellers would now appear to be less active and this divergence suggests being alert to an end to the down trend. Now, the foregoing is not to suggest taking action before price activity confirms what OBV and volume activity have suggested. But if this does occur, you can be ready to take appropriate action.

On-Balance Volume (OBV): A Measure of Volume OBV basically measures how much money is flowing into or out of a security. If the OBV line is dropping, it tells you that people are selling. If the OBV line is rising, it tells you that people are buying. After all, no matter what is happening in the market, if people are pulling money out of a stock, its price will go down. Conversely, if people are buying a stock, its price will go up. Because technical analysis is not an exact science, many traders use OBV to confirm what is happening with a stock. For example, lets say that a stock is up by 3 points but the OBV is dropping. This tells you that although the stock is temporarily going up, its not going to last.

Figure 12.2 On-balance volume

For whatever reason, people, most likely institutional investors, are selling. The dropping OBV is a signal that you should immediately sell the stock. In Figure 12-2, the OBV initially rose along with the Caterpillar stock price. In early December, the OBV was slowly dropping along with the Caterpillar stock price. This was a clear signal that, at least for the short term, institutional investors were selling this stock. One of the biggest problems with technical analysis is that you sometimes get false signals. OBV helps you determine whether the buying and selling pressure is real or whether a reversal is imminent. For example, lets say that the price of a stock is falling but OBV is rising. An alert trader will buy, not sell, because its possible that the stock price will reverse as more buyers accumulate shares.

METHOD 3: CALCULATION OF THE MILLION DOLLAR FORMULA

The formula I finally arrived at to measure professional accumulation and distribution is calculated as follows: 1. Calculate total daily range: Difference between the stocks high and low for the day 2. Calculate Net Change for the day: Difference between the close and the open for the day 3. Calculate percentage of net buying or selling for the day: Divide the close-to-open difference by the high-to-low difference. 4. Calculate the net daily accumulation/distribution (A/D) (shows how much volume was buying or selling volume for the day): Multiply today's volume by the above figure 5. Compute the cumulative A/D flow line: The net daily A/D figure is then added or subtracted to a cumulative A/D flow line. If the opening price is lower than the close, your net volume figure for the day will be positive or a buying figure. This number is added to the daily A/D line. If the close is below the opening, it is a negative, number showing more selling volume. The figure is subtracted from the previous day's A/D line. HOW TO CONSTRUCT A FLOW LINE OF PROFESSIONAL ACTIVITY

In a concise form the equation is this: Net buying or selling volume for the day (net daily A/D figure) = Close minus the opening, divided by high minus the low, times daily volume. To "work up" a stock, arbitrarily choose a base number, say 5,000 and then begin adding the net daily accumulation or distribution volume figure as dictated from the above formula to this base figure. This means on days when there is more buying the net daily A/D figure is added. On days of more selling the net daily A/D figure is subtracted. That's all there is to this concept. Remember, the accumulation flow line is constructed by just adding or subtracting today's net daily A/D figure, as arrived at by the formula, to yesterday's figure. Perhaps an example will clear up any confusion that may exist. I'm showing below six days of trading activity for BAUSCH & LOME. The A/D line column represents the impact of today's net daily A/D figure to the previous day's A/D line figure. Also, I drop the last two digits of the daily volume figure, just as most newspapers do. Hence the volume shown for the first day of 564 actually represents 56,400 shares.
CLOSE OPEN HIGH LOW (C) (O) (H) (L) C-O H-L

% Net Buying/Sel ling = CO/ H-L

VOL

A/D (% NBS * Vol)

A/D LINE (Todays Fig = Prev. fig. + AD)

35.8 37.6 37.7 38.0 38.8 39.0

35.2 36.2 38.3 37.3 38.0 39.7

36.5 38.2 38.5 38.5 30.0 39.8

34.7 36.1 37.5 37.0 37.8 38.2

+0. 6 +1.4 -0.6 +0.7 +0.8 -0.7

1. 8 2.1 1.0 1.5 1.2 1.8

.33 .66 .60 .46 .66 .38

564 789 414 277 425 949

+186 +52 0 -248 +127 +28 0 -361

3208 3728 3480 3607 3887 3526

HOW TO SPOT THE BASIC BUY SIGNAL

My records show that superb buying opportunities present themselves when a certain condition develops in the trading pattern of the stock's price and volume as represented in the A/D flow line. Simply put, this pattern is one that sees the stocks falling to a new low while at the same time this new low in price is not matched by a new low in the A/D line. WHAT THIS MEANS When the price decline has not been matched by a similar decline in the A/D line, we are onto something. This pattern, a new price low not confirmed by a new A/D low, tells us the price collapse was most likely artificial and an attempt to draw the sellers out of the woodwork and sell their stock to the professionals. Reasoning a bit further we learn that if the professionals are willing to manipulate prices lower at the same time the are buying , the obviously have their sights set on higher prices. WHAT THE BASIC BUY SIGNAL LOOKS LIKE On the insert here I'm showing what I refer to as the classic, basic buy signal given by the accumulation/distribution figures. As you can see, the price of the stock fell to a lower low than where it was last supported. On the surface this looks negative. However, on checking the A/D line, we see that this price weakness was not equaled or confirmed by the professional buying and selling. In fact, the A/D line stayed impressively higher and above its previous comparable low point. Indeed, the pros supported and bought the stock on the decline. Thus, we can assume they have greater things in store for the price structure over the next few days, weeks or months. Chart 11

HOW TO IDENTIFY THE STRONGEST POSSIBLE BUY SIGNALS Another feature of this method is that it enables you to visually select the strongest signals. Let's say you have isolated two stocks as potential buy candidates. Both show better price action than the market and both show accumulation has entered them. Then compare the two to arrive at the stock under the strongest accumulation. This is done by simply noticing the difference between the divergences of the two stocks you have selected. What stock shows the greatest divergence between its price action and its A/D line pattern? Find that stock! It is the best of the two candidates. Chart 12

The examples given here should give you an even better feel or indication of what to look for. Notice how stock A clearly fits all our buying criteria, but its A/D line has fallen a bit further than stock B. Incidentally, sometimes you'll see stocks suffer large declines in price while the A/D line barely, if ever, dips. This happened in Disney right at the start of an 80 point move. I also recall it happening in Polaroid. The stock had been trading in a wide swinging trading range. But... its A/D line was shooting skyward telling us the stock would break out of the trading range on the upside and steam ahead. Indeed it did, from the low 80's to the 140 area! HOW TO SPOT THE BASIC SELL SIGNAL The basic sell signal is just the reverse of the basic buy signal! That makes things simple. What we're looking for here is a stock that has rallied to new highs while the A/D line refrained from confirming the new high in the price structure. When that happens, something has got to give. It is almost always the price structure itself. You see, prices are maintained or held up by the underpinnings of volume. If the underpinnings fire weak and crumbling, the price structure will soon come tumbling down until volume and price are once more back in gear. Chart 13

WHAT THE SELL SIGNAL MEANS The sell signal means that professionals are distributing the stock, applying heavy selling pressures to it, despite the apparent rise in price. This is a very bearish omen as it forewarns the pros are bailing out. If they no longer want the stock.... Neither do I! The actual selling pattern you are looking for is illustrated here. In this example we see the price rallying to a new short term high. Is this a valid up move? How do we know? We know by checking the A/D line to see what it says about the rally. In this particular case, we see the A/D line did not rally to a new high. In fact, it fell to a new low. Conclusion? The stock is under aggressive professional distribution. It is going lower. HOW TO IDENTIFY THE STRONGEST POSSIBLE SELL SIGNALS This part of the A/D line study is like the section on spotting the strongest buy signal. What you should be looking for is what stock shows the greatest divergence between its price action and its A/D. Look for the stock that has a splendid new high in price while its A/D line has literally fallen out of bed. That is the stock you want to sell or sell short.

Some examples should help. Notice here how stock A has rallied to a new high along with stock B. Price structure alone does not tell us which stock is the best selling candidate. So what do we do? You guessed i t . . . we take a peek at the A/D line to see which stock has been under the most distribution. In this case, it's pretty easy to tell the difference. Stock A has had some rally attempts in the A/D figures. But look at stock B. What a disaster . .. the A/D line has fallen constantly despite the price rally. Incidentally, these are not hypothetical examples, but right out of my personal chart book.

THE IMMEDIATE PROFIT SIGNAL The immediate profit signal occurs in just one way. It is not frequent, but when it does come look out, a rapid price move is on its way! The signal involves a comparison of the price action and a certain occurrence in the A/D line. The price action I look for is what you know as basing or consolidation.

The chart shown here gives several examples of what we can call basing or small trading areas. The price moves back and forth for several days or weeks. It is locked in the narrow confines of buyers and sellers fighting each other off at the top and bottom perimeters of price evaluation. While this price pattern is developing, we suddenly notice a tremendous surge in the A/D line from one day's data. That is the tip-off and your signal to get in and buy the stock. The one day massive accumulation figure will shoot the A/D line skyward; breaking substantially above the trading range pattern the A/D line has also been in. It tells us the big boys can wait no longer. They have finally begun their move and the move will be to the upside. Buy it! You can make a pretty good living just waiting for these jumps to occur in the A/D line work. I admonish you not to confuse the A/D line jumps with total volume jumps. That is not what we are looking for. We want to find large and extraordinary increases in the A/D line itself, while the price remains in the confines of the trading range. The direction of the A/D line jump forecasts in advance in which direction price will come zooming out of the trading range corral.

A rule of thumb is that the longer prices go sideways on the horizontal time scale, the further will be the potential price move (up or down) when there is a breakout above or below such a long-standing price range. If the breakout is against you and you are long, you should probably exit, preferably by having a stop order that was already in place under the lower boundary of the trading rangeotherwise, by the time you can act the potential loss can be larger than you wished to take. Conversely, if you are long and the breakout is in your favor above the high end of the trading range, this could be a time to add to your position.