The Moving Average Graph or top graph is used to measure a current stocks price to its “moving average”.

1. A blue line- this is the moving average line.
2. A black line- the price line of the stock being evaluated. This line is black when it is above the blue line (North of the Blue) and turns red when it is approaching or below the blue line.

 

Rule #1: Using only the Moving Average Graph: When the price line is above the blue (moving average line) that is a signal to buy. When it goes below the blue line and turns red that is the signal to sell.

 

This is an example chart for Randgold Resources Ltd. (GOLD) There are four buy positions and four sell positions in the graph above.

 

Position I

Buy A	$43.85	03/18/09
Sell B	$48.78	04/06/09
Gain	$4.93	19 days held
%Gain	11.24%

 

Position II

Buy C	$49.80	05/04/09
Buy D	$64.75	07/02/09
Gain	$14.95	59 days held
%Gain	30.02%

 

Position III

Buy E	$64.70	09/03/09
Sell F	$70.05	10/27/09
Gain	$5.80	54 days held
%Gain	8.96%

 

Position IV

Buy G	$67.47	11/03/09
Sell H	$82.75	11/27/09
Gain	$15.28	24 days held
%Gain	22.65%

 

Total

Gain	$41.33	156 holding days
%Gain	94.25%

 

 

The Momentum Graph or middle graph measures the strength of an upward or downward trend.

1. The black line is the moving share price line.
2. The blue line is the moving share price strength.

 

These lines measure buying pressure and investment momentum. This graph can be use to tell you:

1. When to sell and take a greater gain.
2. When to buy to get a lower buying price.

When both the Momentum Graph lines Merge and drop below the 85% line

 

If the black price line in the Moving Average Graph begins to drop off and the two lines in the Momentum Graph merge and fall below 85% it is a strong indicator to sell the stock instead of waiting for the black price line to cross the blue moving average line. This allows you to sell at the higher price.

Rule #2: When the two lines in the Momentum Graph merge together and drop below the 85% line this is a strong signal to sell. This rule enhances the results from rule #1.

 

Combining the Moving Average with the Momentum using rule #2

 

This is an example chart of Green Mountain Coffee Roasters (GMCR). There are three buy positions and three sell positions in the graph above.

 

Rule #1 Moving Average Position I Buy A $25.55 03/12/09 Sell (B) $56.30 07/10/09 Gain $30.75 121 days held %Gain 120.35%     Position II Buy C $56.09 07/14/09 Sell (D) $65.07 08/13/09 Gain $8.98 30 days held %Gain 16.01%     Position III Buy E $65.61 09/15/09 Sell (F) $69.20 10/28/09 Gain $3.59 43 days held %Gain 5.47%     Total Gain $43.32 194 holding days %Gain 169.55%

Rule #2 Momentum Position I Buy A $25.55 03/12/09 Sell (B) $61.63 06/12/09 Gain $36.08 92 days held %Gain 141.21%     Position II Buy A $56.09 07/14/09 Sell (B) $66.63 08/04/09 Gain $10.54 21 days held %Gain 18.79%     Position III BuyA $65.61 09/15/09 Sell (B) $74.80 10/23/09 Gain $9.19 38 days held %Gain 14.01%     Total Gain $55.81 151 holding days %Gain 217.58%

 

Rule #3: When this “W” forms below the 15% line in the Momentum Graph and the right side of that “W” crosses up through the 15% line, the stochastic cycle is completed. Correlate this location to the Moving Average Graph above the Momentum Graph and this reveals the buy in position.

This example chart of Caterpillar Inc. demonstrates the “Stochastic W” buy in position as compared to a Rule #1 buy in position.

 

Rule #1 Buy Position

Buy A	$35.00	07/14/09
Sell B	$57.04	11/27/09
Gain	$21.97	130 days held
%Gain	62.65%

 

Stochastic “W” Buy Position

Buy A	$30.89	07/14/09
Sell B	$57.04	11/27/09
Gain	$26.15	136 days held
%Gain	84.66%

 

The Volume Graph or third graph monitors the amount of share buying and selling intensity.

1. The blue columns measure buying volume.
2. The red columns measure selling volume.
3. Spiking columns of red and blue demonstrate volumes in excess of the average. These excessive volume spikes coincide with the upward and downward movement of the price line in the Moving Average Graph.
4. The positions of these spikes in excess trading volume are indicated by blue and red dots along the bottom of the Moving Average Graph. These dots correspond with the signaling activity of the black price line in Moving Average Graph.