stock for a move of about 9 more points. Further, any time the stock enters our prediction area, we are alerted that we should be setting up and using terminal sell signal procedures!

Figure VI-2 shows what the stock did. It entered the tolerance zone eight weeks later and topped out at 48 3/4! The sell signal generated here would also constitute a sell-short signal. With the 20-week moving average trending upward in this issue, better vehicles could be found for a short transaction. However, just to follow along with our new technique, suppose we both sold and sold-short Alloys Unlimited at this point around 47 or 48. How would we have fared?

Figure VI-3 shows the same stock three weeks later. Prices have decluied to the neighborhood of 42 and we have a 5- to 8-point profit. Should we take our profit here?

Well, we note also that the ten-week moving average has just topped out. Lets estimate how low we expect the stock to go. Extrapolating both the ten- and 20-week averages results in an intersection with stock prices at 42. The stock topped out at 48 3/4 or 7 points higher. We expect it to go 7 points lower, to about 35. The total move anticipated is 14 points, providing a tolerance of about ±11/2 pomts. We predict the stock will continue to drop to the region of 33 1/2 to 36 1/2. The signal weve generated is "hold!"

Figure VI-4 shows what the stock did. The price entered the prediction zone four weeks later, and bottomed out at 35 1/8! Once again we could use our cover-short signal at these levels as a buy signal. Let us assume that we did so, covering our short sale and buying into the stock in the neighborhood of 37 (which we could have done any tune within a five-week interval!).

Figure VI-5 shows the following action just as the ten-week average bottoms out. Extrapolation of the averages results in intersection wdth the stock price at 43 3/4. The stock has moved to this price from 35 1/8, or 8 5/8 points. We anticipate a further move of this amount to 43 3/4 + 8 5/8 = 52 3/8. As usual, we put a tolerance of ±10% of the total move about this price to get a zone of 50 5/8 to 54 1/8 with the target price of 52 3/8. As Figure VI-6 shows, the price of the stock rocketed into this zone the following week, remaining there for three weeks (plenty of time to get out using graphical methods and daily charts). The actual top-out price was 52 7/8!

This sell signal is, of course, also a sell-short signal. Suppose we had sold here and sold short at 51 to 52. Figure VI-7 shows the next reversal of the ten-week moving average. On this transaction, prices have osdllated wildly between 44 and 51 for nine weeks. We are somewhat concerned about our transaction, and wish to know whether or not we should cut and run! Extrapolation of averages provides intersection at 46 3/4. This is 6 1/8 points below the preceding peak. Prices should go down to 40 5/8, ±1 1/4, or into a zone from 39 3/8 to 41 7/8. The stock entered this zone two weeks later and bottomed out at 41!

This simple computational technique is one of the most powerful timing tools in your arsenal. It will not always provide as much information as in this example, but it should be the first computational technique you use as a backup to other methods. As usual, the whole armory of defensive techniques (traiUng loss levels, etc.) should be employed to guard against the unexpected - which does occur occasionally. But, properly used, it can add materially to your confidence in making buy and seU decisions. Best of all, it is not an empirically derived method, but is solidly based on the existence and nature of the price-motion model!

S2t------r-------

RGURE -2

51 50 49 46

PRCVIOUSty PREOfCTEO TOP-OUT ZONE

ZONE

ENTWr-

WEEK PREDICTION WAS MADE-

44 43 42

ACTUAL

INTERSECnON-

A Half-Span Average "SeU" And "Sell Short" Sinnal

FIGURE -

-43 42 41 40 39 38 37

PREWCnON ZONE

36 35 34

The Next Prediction