Stock-price moving averages are simplistic mathematical tools that when used properly become very significant for anyone attempting to cull the future of the movement of any stock using technical analysis! Moving averages on various time frames are a "tell" for me because those averages represent the value and price for each time frame. That value and price is related to the time frames of the holding periods for the trade of the stock in question! Those time frames are the "reflection" of sorts for the short-term trader (the 10-period moving average); the intermediate-term trader (the 46-period moving average); and the longer-term fund manager/investor (the 230-period moving average). I have included my video with Jill at the bottom of the article that we filmed back in June. It includes charts and specific trade examples so you can better understand what I am looking for.
By using the word "reflection" I imply that each time frame when seen relative to the moving averages of the price of any stock "reflects" the potential as per whether or not each of those stocks trading within those time frames might be profitable for each speculator at that precise price point--or not! For instance, a short term trader will not remain calm if his long stock position has not moved up during his/her "normal" 10-day holding period. The more the stock sits around his/her buy price, the more he/she begins to doubt the efficacy of the initial buy of that stock. The same holds true for the intermediate as well as longer-term trader/fund manager. This lack of reward and increasing fear of risk creates precisely the genesis of the emotional ratcheting up that eventually forms the coiling pattern!
As the "coiling pattern" begins to form, the three moving averages begin converging as if "fusing" at one price point. This effect is not lost on those who are speculating on the options of that underlying coiling/fusing stock! Those long any options during this coiling action have been suffering the loss of premium as it decays due to lack of movement. Those short that premium have been capturing "theoretical/paper" profits due to the same effect (after all, we play a zero-sum game in the world of options trading!).
The fact that Wall Street does not suffer for lack of stock price movement for any "long" period of time now comes into play. That is one crucial element behind the theory of my coiling pattern! In fact, this one overriding principal is at the heart of the efficiency of the coiling pattern! My logic here is based on this premise: Wall Street is in the business of enticing you to exchange your money for a stock certificate, and then at some point in the future Wall Street needs to have you reverse that process. Wall Street cannot have you buy and hold or else brokers the world over will have to sell their summer homes as well as yachts! This perpetual-like motion of money and stocks has been in existence from day one of trading and is not about to "leave the building" any time soon! Thus coiling begets uncoiling ad infinitum as money and cyber-paper stocks and options contracts are exchanged, the brokers making a tidy profit in the middle of that process.
When my three moving averages have formed their coiling point, that is the time when Wall Street is ready to get serious about either getting enough of those long and short the stock to either sell it or buy it and doing so post haste lest you miss out doing so! At that price and time, the uncoiling of the volatility crunch commences, and the now rising volatility begins as all of those long and short that stock that is uncoiling begin to see a much more volatile price movement for that stock!
How long the time frame has been as per the formation of the coiling of the volatility of the underlying stock is not significant. What is significant is that to use the coiling pattern properly, you must view the pattern with a time frame of a one-year chart only! In addition, only one coiling pattern for that one year period is valid. The initial price move, the direction of such, is most times the direction that the stock will continue to move. Be wary of the "head fake" move that while rare, it can occur. If you encounter this "head fake", it is best to exit any trade based on the coiling pattern.
To summarize, the coiling pattern needs all three time frames because those time frames represent and reflect all of those who are involved (deeply!) in the price and potential movement of the price of the underlying stock in question. Volatility in that stock will be at its nadir when the coiling pattern has formed. Volatility will expand as will price when the stock breaks out of the fusion of the three moving averages in question. That is so because each of those time frames represents the various types and styles of traders/fund managers attempting to profit from the price movement of the coiled stock. Use a one-year daily price chart and none other. Cover any short premium when the coiling pattern is almost formed, and begin to buy premium at the same time, playing long gamma in that stock.
The coiling pattern should now be ready for you to use for yourself! Go "data-mine" stocks as I do, looking for the coiling pattern beginning or maybe already formed. Then apply your options trading experience and skills in order to effectively profit from your efforts! I am almost every day doing the same! Good hunting!
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