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A Possible Future Buy For Cisco Systems?

03/01/04 09:42:21 AM
by Koos van der Merwe

It can be advantageous to combine various trading strategies. I often use the "Double Bottom" strategy to identify a possible stock set up, and then combine it with the JM trading band strategy to get confirming entry and exit points.

Security:   CSCO
Position:   Accumulate

The chart below of Cisco (CSCO) shows a low reached on February 5th at $23.65. The price then rose to $25.05 in an attempt to fill the gap before falling to a lower bottom of $22.20 on February 24th. This immediately triggered a "watch me" signal on the Double Bottom strategy (see "Using The Double Bottom Strategy, Advantage, 2/19/04 for an explanation of the strategy). Should the price break above the previous low of $23.65 plus 50% of the previous day's trading range, it would give a buy signal.

Applying this to Cisco, the trading range for February 25th was: High - low = range. This figure was $0.42. I will now add half this range, $0.21, to the open of the 26th. Should the price rise above this level, I will consider buying.

A possible future buy for Cisco.
Graphic provided by: AdvancedGET.
How successful is this strategy? If you look back to October 2003 on the chart, you will see that the price formed a low, then a lower low after a pullback, followed by a rise above the target level, suggesting a possible buy. On the chart, I have shown the buy as a break above the upper JM band on a rising RSI indicator, thus confirming the double bottom buy.

A JM trading band is a 15-period moving average offset by 2% positive and -2% negative. A move above the upper trading band signals a buy signal.

Combining the two strategies can give a very definite advantage -- any break upwards in the double bottom strategy can forewarn of a future buy signal in the more conservative JM strategy.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Date: 03/02/04Rank: 5Comment: Took a position in CSCO a couple of weeks ago so very timely for me. However I m unfamiliar with the JM band and will have to research that, the article does not give enough info.

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