Taken from Joseph E Granville's Strategy of Daily Stock Market Timing for Maximum Profit" Prentice Hall 1960
The 200-Day Moving Average Price Line Analysis
It is believed that the 200-day moving average line stock charts are the most informative and profitably reliable indicators of where a stock is headed, provided the eight basic ways of reading them are known and followed. The 200-day chart having a slower moving average line, is considered to be more reliable than a 10-day, 50-day, 80-day or 10-day moving average price chart. The penetrations of that average line by the actual price of the stock are considered to be more meaningful. The complete chart consists of the actual price line of the stock with a 200-day moving average price line superimposed over it.
The eight basic ways of trading successfully by using these 200 day moving average price charts are as follows:
(1)If the 200 day average line flattens out following a previous decline, or is advancing, and the price of the stock penetrates that average line on the upside, this comprises a major buying signal.
(2) If the price of the stock falls below the 200 day moving average price line while the average line is still rising, this also is considered to be a buying opportunity.
(3)If the stock price is above the advancing 200-day line and is declining toward that line, fails to go through and starts to turn up again, this is a buying signal.
(4) If the stock price falls too fast under the declining 200-day average line, it is entitled to an advance back toward the average line and the stock can be bought for this short-term technical rise.
(5) If the 200-day average line flattens out following a previous rise, or is declining, and the price of the stock penetrates that line on the downside, this comprises a major selling signal.
(6) If the price of the stock rises above the 200 day moving average price line while the average line is still falling, this also is considered to be a selling opportunity.
(7) If the stock price is below the falling 200-day line, and is advancing toward that line, fails to go through and starts to turn down again, this is a selling signal.
(8) If the stock price advances too fast above the advancing 200 day average line, it is entitled to a reaction back toward the average line and the stock can be sold for this short-term technical reaction.
An actual 200 day moving average price chart is now shown in order to illustrate how the above 8 signals can be used to maximize stock trading profits.
The stock was a buy in January 1958 at $47 a share as seen by the upside penetration of a bottoming out 200-day line (Buy signal #1). The trader would have sold the stock at $67.50 in late January 1959 on its continuing inability to surpass the November 1958 high of $71, expecting a retraction toward its 200-day line (Sell signal #8). The stock was repurchased at $62.50 in early March 1959 after it had gone under its 200 day line because the stock had met support and started to turn up following its downside penetration of a rising 200-day line (Buy signal #2). The stock provided a second buy signal on its upside penetration of the 2O0-day line at $66 later in March 1959 (Buy confirmation). The stock was again a sale between $82.50 and $85 the end of April 1959 (Sell signal #8). The stock was then repurchased at $72 in June 1959 (Buy signal #3) and sold out at a slight loss at $70 on downside penetration of the 2O0-day line in August 1959. The stock turns up from support level demonstrated in February 1959 and is repurchased at $64 in September 1959 for technical recovery back toward the 200-day line (Buy signal #4). Failing to reach that line after approaching it at $67.50 in December 1959, the stock is sold at $65, the level breaking the November 1959 support (Sell signal #7).
Recapitulating, the trader (restricting himself to the long side of the market has a $3,900 profit on an initial $4,700 outlay, a percentage gain of almost 83% in less than two years.
Bought Sold Gain Jan 1958 100 shares at 47 Jan 1959 at 67.5 2050 Mar 1959 100 shares at 62.50 April 1959 at 82.5 2000 June 1959 100 shares at 72 Aug 1959 at 70 -200 Sep 1959 100 shares at 64 Dec 1959 at 65 100
Net Gain $3,950
In the above example a very significant point is seen: Because of the guidance provided by the 200-day moving average price Line, the slight 2-point loss on the August 1959 sale was prevented from becoming a bigger loss. While it is always sound advice to tell somebody to let their profits run and cut their losses short, this is often easier said than done, human nature dictating the frequent taking of profits but the infrequent taking of small losses This allows small losses to often run into big losses.