V.9:12 (499-504): SIDEBAR: BUYS AND SELLS

BUYS AND SELLS

In Figure 3a, the greatest buying opportunity occurs when price action becomes strong at a time that many are doubters. Depicted are indicators of both price strength and investor sentiment. Relative and absolute strength are indicators of price. When Merrill's relative strength line is rising, its stock price is outperforming the market. When Merrill's absolute strength line is rising, then Merrill's stock is behaving better than it typically does, given Merrill's beta and the current market action. (Beta measures a stock's sensitivity to the direction of the market.) Points P1 to P2 show price advancing to a peak in mid-1989. While relative strength was flat, absolute strength was declining, suggesting that the stock was responding to the market's advance in a weaker-than-normal way. After the peak in price, profitable short selling occurred — whenever the shorts make money, the technical underpinnings for a stock are considered weak. Toward the end of 1990, as price and relative strength sank to new lows at points P3 to P4 and R3 to R4, absolute strength turned up (points A3 to A4). The shaded area begins at a time where clearly price is strong, as both relative and absolute strength are trending upward. Doubters added fuel for the advance, as the short interest ratio was relatively high. All the ingredients for a buying opportunity were in place.