The next week, I and Bob went to Master Wong's house to meet him.
Master Wong was sitting near the swimming pool.
It was a perfect pleasant and sunny weekend and it was fun to sit near the pool.
Master Wong: There are two types of swimmers who use the swimming pool.
One type of swimmer comes near the pool and directly jumps into it.
The other type of swimmer is more careful. First, he comes near the pool, then dips his toe in the pool water to see how cold or how warm it is.
If the pool water is too cold for him, he goes away and does not swim.
If the pool water is warm, he slowly goes and submerges into the swimming pool.
Bob: Yes, I know. I am of the second type. I always test the water to see if it is too cold or too hot for me.
Sanjoy: Oh! I am of the first type. I just plunge into the pool. If the water is cold, your body will get used to it and you will not feel cold after some time.
But it is more fun to just jump in the pool and not think about the temperature.
Master Wong: The reason I am telling you about this is because that is the behavior different stocks exhibit when they cross the 50 day moving average. As you know the 50 days moving average is one of the most important indicators watched by traders and financial institutions.
When the stock crosses the 50 days moving average, it can do it in two ways. And I will explain how to deal with each situation.
Master Wong asked his assistants to bring a drawing board outside.
He then drew the following.
Here is a typical stock that touches the 50 days moving average many times. It touches and then moves away and then touches. Ultimately, it breaks down and then goes below the moving average,
If you see this, do not short at point A or point B.
You wait patiently for the stock to come up again. Usually, if the stock is so hesitant to go below the 50 days moving average, it will again test and jump up and try to touch the 50 days moving average after crossing it from below.
Note that at point C, it tried to go up and touch the 50 days moving average again, but failed and is going down. You should SHORT the stock at point C as it offers the point of minimum risk.
Later, the stock makes a lower high and a lower low at point D, which is a sign of down trending stocks.
Bob: Oh! I see. This is a new way to look at the stock.
Master Wong: Yes! And then there are other type of stocks. They just PLUNGE through the 50 days moving average.
When a stock plunges through the 50 days moving average, it indicates that the big traders are desperate to sell the stock.
For those stocks, you should short the stock as soon as it plunges through the 50 days moving average.
Bob: But, how do you define PLUNGE?
Master Wong: If the length of the stock price bar is much longer than the previous 8 or 9 bars, it means it is a plunge.
So, you have to look at the range (which is the difference between high and low of the bar)
Bob: Oh!I see. In the figure, at point A, there is a bar which crosses the 50 days moving average on a huge range. This bar is larger length than the previous 8 or 9 bar.
So, I would short at the next bar after point A.
Master Wong: Correct. Also, stocks having this type of pattern can be detected using DreamTai.
After you load the stocks, DreamTai opens a browser window and show different stocks with different strategies.
This strategy is one of the strategy detected by DreamTai and the stocks which satisfy this pattern are displayed on that browser page.
In short, now you know how to handle a stock when it crosses the 50 days moving average.
It it crosses on a large range, you can short it.
It it goes slowly below, you wait for it to retrace up and then short it.
Next time, I will show you some other patterns to profit from.
Here is an assignment for you. Go through your stock lists in DreamTai and try to identify stocks which are moving through the 50 days moving average on large ranges.
