Rule
- Rationale
- Stocks will show a tendency to “obey” either their 10-day or 50-day SMA.
- A stock “obeys” its 10-day SMA if it is able to hold above its 10-day SMA for at least 7 weeks following a buy point without ever violating the MA.
- A stock might follow its 20-day SMA and 65-day EMA, but it is more often the exception
- Selling rule
- For a profitable position, if a stock “obeys” its 10-day SMA, use the 10-day SMA as a selling guide, such that a violation of the MA would cause you to sell your position, or at least some portion of it. If a stock does not “obey” its 10-day SMA, use the 50-day SMA as your selling guide.
- For a non-profitable position, if the stock violates its 10-day SMA, decide whether to sell depending on the stock quality and general market strength.
- What it means to violate an MA
- Need to allow for porosity around the MA, i.e. the tendency for price to briefly move beyond a moving average before returning back above it.
- To be considered a violation of an MA, price must close below the MA, and then on next day or over the next few days the stock must move below the intraday low of the first day it closed beneath the MA.
- If a stock violates a MA, but is doing so within a tight, narrow price channel, wait to sell only if the stock undercuts the low of the price channel.
- Counting details
- A buyable gap-up (but not another pocket pivot) will reset the seven-week clock back to zero.
- If the stock has been obeying the 10-day SMA prior to the pivot point, the count begins there.
- If the stock has been basing, the count begins on the day of the pivot buy point (e.g. pocket pivot, standard base-breakout, buyable gap-up, etc.)
