Watchguard
Technologies (NASDAQ: WGRD)
Market Call™ for January 17, 2001
Contributed by Mark Seleznov, TrendTrader.com.
The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Combining Indicators
Two of my favorite trading indicators are Moving Average Crossovers and
MACD. When these two indicators in sync, trading signals tend to be more
reliable. I also like trading with the Trend. A trend is a trend until the
trend changes!
Moving Averages and Moving Average
Crossovers
The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer period) average crosses above the longer-term average
from below, this is a buy signal. When the shorter-term average crosses
below the longer-term average from above, this is a sell signal.
Moving averages are used to smooth prices, dampening the distractions of
short price movement so that the underlying trend is clearer. Moving
averages always lag the market and, therefore, will never buy market bottoms
or sell market tops. Like any other trend-following system, the moving
average crossover will perform best when markets are trending because it
automatically places the trader on the right side of every extended move.
When markets are moving sideways, however, the lack of extended moves will
cause losses.
MACD - Moving Average
Convergence/Divergence
The MACD (“Moving Average Convergence/Divergence”) is a trend following
momentum indicator that shows the relationship between three moving averages
of prices.
This method can be used for any time frame. It could be 5 minute bars, 15
minutes bars or daily bars. Many traders will also trade in multiple time
frames using a longer time frame for trend, and the shorter period for entry
and exit.
The MACD is the difference between a 26-period and 12-period exponential
moving average. A 9 period exponential moving average, called the “signal”
(or “trigger”) line is plotted on top of the MACD to show buy/sell
opportunities. On the charts below, the MACD line is the green colored
line, and the trailing, slower moving line is the signal line. Some
technical analysis programs will show the MACD as a histogram bar.
There are three popular ways to use the MACD: crossovers,
overbought/oversold conditions, and divergences.
The most common use is as a crossover method. Using this interpretation,
the trading rule is to sell when the MACD falls below its signal line.
Similarly, a buy signal occurs when the MACD rises above its signal line. It
is also popular to buy/sell when the MACD goes above/below zero.
Some traders will use MACD as an overbought and oversold indicator. When
using the indicator in this manner, when the shorter moving average pulls
away dramatically from the longer moving average (i.e., the MACD rises), it
is likely that the security price is overextending and will soon return to
more realistic levels. MACD overbought and oversold conditions vary from
security to security.
The other way some traders use MACD is to spot divergences from an
anticipated movement. Since there are no indicators or patterns that work
all the time, reactions against the anticipated move can signal a major
move. A bearish divergence occurs when the MACD is making new lows while
prices fail to reach new lows. A bullish divergence occurs when the MACD is
making new highs while prices fail to reach new highs. Both of these
divergences are most significant when they occur at relatively
overbought/oversold levels.
Let’s look at Watchguard Technologies,
WGRD.
After moving down for weeks and staying below its moving average crossover
pattern, WGRD found support on 01/10/2001 and broke up at the end of the
day.
The MACD and Moving Average systems would have given us a nice trade then,
but this does not mean the move is over. We continue to have a strong
moving average buy signal and today gave us a strong MACD buy signal since
the MACD looked to be rolling over yesterday but has now reversed back to
the buy side.
I would Buy WGRD here.
Don’t be a hero or get greedy if the stock goes up, there is a lot of room
to
the upside, but plenty of room to the downside too! I would place a stop at
19 3/16 and continue to move it up as the stock moves.
If the stock does move nicely, look for a large price spike and exit at the
first � point retracement. If any news comes out, exit in a hurry; if you
don’t, everyone else will.
Many stocks are exhibiting similar patterns. Set up your TORS software with
the standard parameters used here and look for similar trades with good risk
vs. reward characteristics.
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Call Information
Mark A. Seleznov is a General
Securities Principal and Managing Partner of Trend Trader, LLC, a NASD, SIPC broker/dealer firm located in
Scottsdale, Arizona. A professional trader for over 25 years, Mark was a Market Maker on
the Philadelphia Stock Exchange, a Retail Registered Representative, and futures trader.
Mark is an author and recognized expert in equity Day Trading. He conducts seminars in
Equity Day Trading and offers his firm traders training and support. If his firm holds any
positions in the public companies he writes about, it will be noted at the bottom of his
article.
Market Calls is a daily syndicated column on trading by Mark A. Seleznov, Managing Partner
of Trend Trader,
LLC. For information on obtaining Market Calls for your web site,
newspapers, or publication, contact Trend Trader, LLC at 602-948-1146
Disclaimer: Trading in securities may not be suitable for
all individuals. Consult your broker or other professional to determine your suitability.
This is not an offer to buy or sell securities. The advice given above is of a general
nature and should not be taken as a recommendation to buy or sell the referenced security.
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1998-2000 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
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is strictly prohibited.
Last modified: January 17, 2001
Published By Tulips and Bears
LLC
