IX. Ejecución
IX.5 Diseño de pruebas efectivas y eficientes de auditoría
IX.5.2 Técnicas de Auditoría
We have looked at the concept of building a channel trend line to aid in our overview. There are many other methods and vari- ations of that theme that attempt to accomplish the same goal. Two, however, are widely accepted and have earned a place in the chapter. Let’s first look at the “percentage envelope.” (See Figure 5-5.)
This approach is based on the idea that stock prices “trend,” and within that trend there is a reasonable movement both up and down in the overall pattern. By calling a moving average line the center price of a stock, we could then place two other
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lines at equal distances above and below the centerpoint and place that envelope around the price chart. What we assume is that a price will tend to stay within that envelope for the vast majority of the time, swinging back and forth within a normal range. Even on directional changes an envelope will tend to bend with the price.
There are occasions where stocks or indexes will push past their boundaries of the envelope, but most of those moves hap- pen because of major news and tend to be short-term happen- ings. When that occurs, usually an overbought or oversold con- dition develops and a reversal quit often follows. But barring those outliers, you will find that an envelope will contain most of the action in a stock. There are no hard-and-fast rules as to the percentages used in drawing the lines. Today many people use a 3 percent envelope when looking at the larger indexes like
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the S&P or the New York Stock Exchange and a somewhat larger band for individual issues. The more volatility a stock has, like a technology issue, the more room you should allow yourself. An envelope for the NASDAQ, for example, would most likely need a 6 percent upper and lower limit, as the NASDAQ has higher volatility than the Dow.
Another powerful method of “banding” a stock was devel- oped by a very fine technician, John Bollinger. In the envelope we have two lines at an equal distance from the moving aver- age line. John Bollinger took a new approach by employing the concept of “standard deviation” in his calculation. This concept of standard deviation is another way of capturing almost all of the price swings around an average. The usual length of that average is 20 days, but it can be used on weekly or monthly charts as well. Bollinger uses a two standard deviation in his work in order to capture all but a small percentage of the stock’s move. The main difference between his approach and envelopes is that the Bollinger bands expand and contract depending on the volatility of the average. In a period of slow-moving mar- kets, the bands tend to narrow, and when the action increases, we see the bands widen once again. Like the channels and en- velopes when the upper and lower bands are touched, a rever- sal back towards the other side of the bands could be antici- pated. Another point is that when the bands find themselves closing in on each other, it is an indication that a directional change could be at hand. (See Figure 5-6.)
Volume
T
he study of volume as it relates to price activity should be a significant part of your technical education. For reasons that will become clear, it is the second most studied piece of information, outside of price, an analyst will use. The most important data in technical analysis is price, but if we want to measure an in- vestor’s intensity in that price movement, then volume is the best overall piece of data to follow. This data point is the tech- nician’s confirmation device and is employed in almost all facets of our work. Some of the techniques in technical analysis do not use volume such as point and figure charting. If you recall from Chapter 3, that approach is strictly price oriented. In P&F chart- ing, volume and time have no place. Other styles of technical analysis use volume in varying ways to spot trend moves, con- firm price movement, or to zero in on where the money is flow- ing. Remember the great line in the old movie All the Presidents Men when Deep Throat told the two reporters to “follow the money.” In our business the money is represented by the vol- ume. If you keep your eyes on it and combine that knowledge with the price action, you can improve your odds greatly.When I speak of volume, I am referring to the total amount of shares traded in a stock or a market for a given time period. Of course, volume can be measured for almost any time frame— daily, weekly, monthly, etc. The basic rule is in order. For an up- ward price trend to continue, you should see a volume pattern
that is increasing in the same direction. If we have a rising stock price, volume should expand in that prevailing direction. The confirming nature of volume carries into periods of short-term contra moves as well. Any rally will have short-term reactions because of a temporary overbought state. The volume patterns during these interruptions should decline and rise again once the longer-term pattern resumes its original upward direction.
Downside volume tends to take a different path. In the be- ginning of a decline, we may well see volume expand above the average trading volume level. The problem with declines is that as a stock or a market becomes entrenched in its fall, volume also tends to fall away.
There are a number of explanations for this behavior. The most obvious one is that as the reason for the drop becomes known to the public, they tend to avoid the problem. Unlike many professionals that must trade a certain stock, John Q. doesn’t have to invest every day. So a stock can simply waste away because of lack of interest. An example of a common trap that you must be on guard against is the concept that if a stock is going through a light volume decline, it is suggesting that a positive move to the upside is at hand. It might be true that having a light volume decline could be a constructive develop- ment, but you cannot tell until you examine the move closely and use other technical indicators before reaching a decision. In a normal short-term contra decline to relieve an overbought con- dition, a light volume decline is bullish. That fact has been dis- torted over the years so now people, trying to be positive, have said that all light volume declines are good. They are most cer- tainly not good. Most of the 1960s saw nothing but light volume declines that nearly shut Wall Street down permanently.
In a long-term decline, however, many times a pickup in volume will occur after a bottom has been reached. Even then it usually takes a few tests of support zones and improvement in price before a real increase in volume is noted.