Microanalysis
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Microanalysis begins by studying the three-day exponential moving
average of the close. The moving average is plotted with one year of
daily data on the specific stock you wish to analyze. This specific
moving average is extremely important to the short-term trader. In
stocks and markets there is a 2 1/2 day cycle of trend. This moving
average identifies the short-term trend of the stock you are analyzing.
By analyzing the three-day EMA you can refine your entry and
exit points on a short-term basis. Let us take a look at several examples
of how to use the three-day EMA.
The first thing you will notice after plotting the three-day EMA
is how it defines and smoothes the direction of trend. In Figure 5.13, I
have plotted the three-day EMA on one year of data. As you look at
the chart, you not only see the trend but the slope of the moving average.
This helps you determine the strength of the trend. You will also
notice that when the three-day moving average tops, it tends to
exhibit either a sharply rounded point or a sharp inverted V. This is
a pattern that short sellers will be looking for, especially when the
top formation corresponds with a primary bearish chart pattern.
Bottoms tend to be slightly more rounded in shape unless the bottom
is part of a reversal day spike. This is another positive feature of
the three-day EMA. It tends to trace out and make major chart patterns
much easier to see. Yet another use of the three-day EMA is in
the placement of stops or exit points. This will be examined later in
this chapter. Let's identify the main features of the three-day EMA on
one year of price data before we take a closer look at microanalysis.
Microanalysis begins by studying the three-day exponential moving
average of the close. The moving average is plotted with one year of
daily data on the specific stock you wish to analyze. This specific
moving average is extremely important to the short-term trader. In
stocks and markets there is a 2 1/2 day cycle of trend. This moving
average identifies the short-term trend of the stock you are analyzing.
By analyzing the three-day EMA you can refine your entry and
exit points on a short-term basis. Let us take a look at several examples
of how to use the three-day EMA.
The first thing you will notice after plotting the three-day EMA
is how it defines and smoothes the direction of trend. In Figure 5.13, I
have plotted the three-day EMA on one year of data. As you look at
the chart, you not only see the trend but the slope of the moving average.
This helps you determine the strength of the trend. You will also
notice that when the three-day moving average tops, it tends to
exhibit either a sharply rounded point or a sharp inverted V. This is
a pattern that short sellers will be looking for, especially when the
top formation corresponds with a primary bearish chart pattern.
Bottoms tend to be slightly more rounded in shape unless the bottom
is part of a reversal day spike. This is another positive feature of
the three-day EMA. It tends to trace out and make major chart patterns
much easier to see. Yet another use of the three-day EMA is in
the placement of stops or exit points. This will be examined later in
this chapter. Let's identify the main features of the three-day EMA on
one year of price data before we take a closer look at microanalysis.