Page 212 - THE MARKET WHISPERER

208 PART 7 - Indicators: The Trader’s Compass

to the 20MA. This assumes that a strong stock will separate from the
20-period line of support but will return back to support as it continues

to trend up. When the stock drops clearly below the 20MA line, we expect
it to be supported by the 50MA line, but this is also the stage where we
begin suspecting a reversal may be occurring. Breaking down under the
50-period line almost always means a trend reversal. Additional support

should come from the 200MA line.
For upward trending stocks, when the chart crosses below the 20MA

line, it means the uptrend could be about to reverse. Similarly, for stocks

trending down, when the chart crosses above the 20MA line, it means the

downtrend is about to reverse.
A formal reversal can be defined when both the slow and the fast-

moving average lines converge: for example, in the chart of Akamai, we see
where the 50-period and 20-period lines converge at [2]. The significance

of the reversal is that in the short range of 20 periods, the stock has
dropped, while at the longer range of 50 periods, the stock is still holding

the uptrend. Some traders wait for this convergence point to sell, but in my
opinion that is already too late. Checking the Akamai chart, we see clearly

that the decision to exit could be made long before then.
Moving averages that parallel each other and are known as “railway

tracks” indicate a long, continuous trend. Distancing of MA lines from

each other indicates a strengthening trend, while closeness indicates a
weakening trend. At [1] we see the start of distancing (divergence), and
near [2] we see signs of closeness which ends with convergence of the

lines.

SMART Divergent “railway tracks” indicate a strengthening trend.
MONEY Tracks that begin to converge indicate the potential danger
of trend reversal.

Why Calculate a 20-Period Line?
There are two reasons. First, it has become the normal conduct for the
market. Second, it is a self-fulfilling prophesy. Many traders assume there
will be support at the 20MA and therefore buy stocks supported by this
line, which is considered the technical support point.

What’s Up? What’s Down?
In a stock trending up, you will want to see the stock riding above the 20
period line, which is above the 50 period line, which should be above the