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Simplicity
Has Sharpened John Murphy's Skills
By
Jim Wyckoff
(Note:
I wrote this story a few years back, when I was a journalist with
FWN.)
"My
work has gotten better due to simplifying my approach," John J.
Murphy, the veteran technical analyst, author and CNBC resident
technical analyst, told a group of equities and futures traders
attending the Technical Analysis Group (TAG) XVIII trading
conference sponsored by Dow Jones Telerate in New Orleans.
Murphy
said he relies heavily on five or six "useful" technical
indicators, including relative strength indicators, trendlines,
moving averages, Bollinger bands, classic chart patterns such as
triangles and double tops, and Fibonacci retracement levels.
"You
must trade a combination of technical signals, not just one"
indicator, said Murphy. He said that many times he'll set up a
"good" column and a "bad" column regarding
technical studies. If the "good" column has the
overwhelming evidence supporting a selected trade, Murphy will enter
the trade. But if the evidence supporting a trade is not strong
enough, he'll bypass the trade.
Murphy
correctly called the topping of the U.S. semiconductor stock index
(SOX) during mid-summer (of the year this story was written). His
reasoning was plain and simple: the SOX uptrend line was broken,
followed by a double-top formation. "The first sign of a top is
breaking of an uptrend line," he said.
On
moving averages for individual stocks, Murphy likes to use the 50-,
100-, and 200-day moving averages. If the 200-day moving average on
an individual stock is broken on the downside, "big
trouble" is in store for that stock. Also for stock sectors, he
said if a 50-day moving average breaks down, "that sector is in
trouble."
Charting
a stock market sector divided by the S&P 500 is a favorite
method the veteran technician uses to determine if a given sector is
underperforming the broad market. (Examples: SOX index divided by
S&P 500 index, or NASDAQ index divided by the S&P 500
index.)
Another
good technical indicator is the Moving Average Convergence
Divergence (MACD), said Murphy. The MACD uses exponential moving
averages, as opposed to the simple moving averages used with an
oscillator. Gerald Appel is credited with developing the study.
Longer-term
technical signals are more powerful than shorter-term signals, said
Murphy. "Longer-term charts give you the value of
perspective," he said.
Many
traders consider Murphy's book, "Technical Analysis of the
Futures Markets" to be the bible of technical analysis. Murphy
heads his own consulting firm, based in Oradell, N.J.
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