The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

SELLING AT A MOVING AVERAGE

Robert Rhea, a prominent market technician during the first half of the twentieth century, described the three stages of a bull market. During the first stage, prices recover from the oversold excesses of the preceding bear market—they rise from deeply undervalued levels back to value. During the second stage, rising prices reflect improving fundamentals. Finally, during the third and final stage, prices rally on enthusiasm, optimism, and greed—people buy “because prices have always gone up.” Rhea, who had done a great deal to popularize the Dow Theory, was writing about bull markets that lasted several years. I found that I could apply his concept to shorter timeframes.

We have already discussed how moving averages reflect a longer-term consensus of value. When prices crash below a moving average and drag it down, a bear move is in progress. When prices stop declining and the moving average flattens out, we need to become alert to the possibility that the bear may be dead.

The markets run on a two-party system. When the bear party loses power, we anticipate that the next election will go to the bulls. The first target for a bullish move is a rally back to value, up to the moving average.

This approach to buying below value and setting the profit target in the value zone works especially well with the weekly charts. The Triple Screen trading system calls for making strategic decisions on the weekly charts and implementing them on the dailies, ...