Charts are easy to draw online. Two

Charts are easy to draw online. Two of the best sites are stockcharts.com and www.
bigcharts.com. Here is an example from finance.yahoo.com:
As illustrated, we have drawn a moving average chart for Microsoft. The jagged
line tracks Microsoft’s daily stock price over the past year. The two smoother lines
are the 50-day and 200-day moving averages. Notice the 50-day average crosses the
200-day average in August from below. Such a crossing is sometimes interpreted as a
signal to buy. In this case, the signal was false in the short run because the stock subsequently
fell in price. Despite the fall, the 50-day moving average remained above the
200-day moving average. Investors who stayed in have made a profit.
Putting it All Together Quite often, a market technician will be using multiple chart
indicators to help in making trading decisions. Let’s examine the collection of technical
information available from the Web site www.bigcharts.com. We set the Web site
controls to give us three months of daily data for General Motors (GM). In addition, we
asked the Web site to provide us with 9-day and 18-day exponential moving averages,
Bollinger bands, volume, MACD, and money flow. The results appear in Figure 9.10.
Work the Web
Bollinger Bands John Bollinger created Bollinger bands in the early 1980s. The purpose
of Bollinger bands is to provide relative levels of high and low prices. Bollinger bands
represent a 2-standard deviation bound calculated from the moving average (this is why
Bollinger bands do not remain constant). In Figure 9.10, the Bollinger bands surround a
20-day moving average. The Bollinger bands are the maroon bands that appear in the top
chart. Bollinger bands have been interpreted in many ways by their users. For example,
when the stock price is relatively quiet, the Bollinger bands are tight, which indicates a
possible pent-up tension that must be released by a subsequent price movement.
298 Part 2 Stock Markets
MACD MACD stands for moving average convergence divergence. The MACD
indicator shows the relationship between two moving averages of prices. The MACD
is derived by dividing one moving average by another and then comparing this ratio
to a third moving average, the signal line. In the GM example, the MACD uses a
12-day and a 26-day moving average and a 9-day signal line. The convergence/divergence
of these three averages is represented by the solid black bars in the third chart
of Figure 9.10. The basic MACD trading rule is to sell when the MACD falls below
its signal line and to buy when the MACD rises above its signal line.
Money Flow The idea behind money flow is to identify whether buyers are more
eager to buy the stock than sellers are to sell it. In its purest form, money flow looks
at each trade. To calculate the money flow indicator, the technician multiplies price
and volume for the trades that occur at a price higher than the previous trade price.
Figure 9.10
Technical Analysis
Data for General
Motors
60
40
20
0
Millions
Volume ©BigCharts.com