Fundamentals
Generate Income,Trade Options Like a Pro
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Moving averages |
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Moving averages smooth out a data series and make it easier to identify the trend direction, and are an effective tool identifying and confirming a trend and identify support and resistance levels. Moving averages are plotted in any period from monthly to weekly, daily, intraday, such as hourly, 30 minutes, 15 minutes and 5 minutes. • An uptrend is established when a security forms a series of higher highs and higher lows. • A downtrend is established when a security forms a series of lower lows and lower highs. • The trading range is established if a security is not in an uptrend or downtrend. A resemblance to trading range shown in the last example of the symbol TOL weekly chart, a clear uptrend will start when the upper resistance level of the range is broken upwards and stays above for at least two days. A downtrend established when a support level brakes downward and stays below the support level for at least two full days. As mentioned before, the moving average can act as a support and resistance line. The following examples provide a resistance level for downtrend and a support level to an uptrend. |
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 Symbol; JNJ, Daily data collected from Jan2007 to Jan2008. |
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Johnson & Johnson (JNJ) is engaged in the research and development, manufacture and sale of a range of products in the personal products and healthcare field. Johnson & Johnson has more than 250 operating companies. On the graph plotted a 50-day simple moving average, which clearly shows an uptrend break; in September the stock rallied steeply until the convergence phenomenon imposed the stock to pull back to the 50 days simple moving average that acts now as an uptrend support level. The stock rallied back up to a higher level, the second time it moved away from its average in December again the phenomenon imposed recoil to the 50 days simple moving average then it acts again as a support trend line. |
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 Symbol; C, Daily data collected from Aug2007 to Aug2008. |
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Citigroup Inc. (C) is a diversified global financial services holding company whose businesses provide a range of financial services to consumer and corporate customers. Citigroup is a bank holding company. This time a 50-day simple moving average is plotted on the graph. In October 2007 a breakdown below the moving average line, started a downtrend and by the mid of January 2008 was a sudden drop accompanied by high volumes, prices drifted away from the moving average line. However, not for long, as you can see; prices began regressing back to the mean (the moving average line). A false break up accrued in May 2008 but the downtrend was stronger than this minor uptrend and prices continued to drop. |
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