Thomas H. Yarborough
The book is written for the conservative investor who wishes
to create a cash flow from writing calls as well as for the option buyer who
wishes to speculate on the movement of a given stock.
There is no doubt that if some of the principles in this book
had been applied to investor strategy between years 2000 and 2002 that not only
could financial disaster have been averted, but also a tremendous amount of
money could have been made.
Thomas Yarborough started to learn about technical analysis
from his aunt in 1965 even before going to Guilford College to major in economics.
He started working in the brokerage business in 1970 and by the time that he
left UBSPaineWebber in 2001 he was a million dollar producer specializing in
foreign institutional business, sharing his technical analysis and option strategies
with traders who came to rely on his input.
I have a simple rule of thumb when it comes to trends. I
use three moving averages, the 10-day, the 50-day and the 200-day moving averages.
My ideal situation is when the 10 day is above the 50-day moving average and
the 50-day moving average is above the 200-day moving average. When the 10-day
moving average moves below the 50-day moving average this is a warning sign
to me. When the 50-day moving average crosses below the 200-day moving average
(termed “the cross of death”) this is a full-blown exit sign for
me. Of course the opposite is also true. If I am short a stock or own puts in
a stock and the 50-day moving average crosses above the 200-day moving average,
I use this as a sign to exit my short and go long.
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.
