The Basic Guide to Understanding Options and Technical Analysis and Strategies for Their Use

If you look at the chart of the NASDAQ, in illustration 3, you will see that if you had used this as your guide, you would have saved a tremendous amount of money in this bear market (or made a tremendous amount of money if you were short).
As I said before this is a very simplistic approach but it works well with trends. During a consolidation pattern, one in which a stock is going sideways, this can be a real whipsawing indicator. In the previous chart of the NASDAQ we don’t really see any such pattern taking place, but it can occur, as is indicated in the chart below of Coca Cola.

I recommend finding any chart of any company and going back over any period of time, whether it is one year or ten years, and see if this technique of buying a stock when the 50-day moving average crosses above the 200-day moving average and exiting the position when the 50-day moving average crossed below the 200-day moving average. I think you will find that you would have done extremely well following this strategy. We had been spoiled for so many years of a bull market that using this type of strategy did not seem to be important. A bear market, however, can shed much light on the necessity to have an investing discipline other than “buy and hold”. There are many people suffering right now who practiced that strategy with Lucent, or Corning Glass. These are just two of many (ex) blue chip companies that have unbelievable drops and have hurt many widows and orphans that chose to “buy and hold.”

I don’t want to give the impression that there has never been an instance of a stock chart looking fantastic, with the 50-day moving average above the 200-day moving average and the MACD looks strong and the On Balance Volume looks strong only to have the stock gap down 30 or 40%. This does happen, but in my experience, it happens very infrequently.