CASE PROBLEM

Brett Daly is an active stock trader and an avid market technician. He got into technical analysis about 10 years ago, and although he now uses the Internet for much of his analytical work, he still enjoys running some of the numbers and doing some of the charting himself. Brett likes to describe himself as a serious stock trader who relies on technical analysis for somebut certainly not allof the information he uses to make an investment decision; unlike some market technicians, he does not totally ignore a stocks fundamentals. Right now hes got his eye on a stock that hes been tracking for the past three or four months. The stock is Nautilus Navigation, a mid-sized high-tech company thats been around for a number of years and has a demonstrated ability to generate profits year-in and year-out. The problem is that the earnings are a bit erratic, tending to bounce up and down from year to year, which causes the price of the stock to be a bit erratic as well. And thats exactly why Brett likes the stockthe volatile prices enable him, as a trader, to move in and out of the stock over relatively short (three- to six-month) periods of time. Brett has already determined that the stock has decent fundamentals, so he does not worry about its basic soundness. Hence, he can concentrate on the technical side of the stock. In particular, he wants to run some technical measures on the market price behavior of the security. Hes obtained recent closing prices on the stock, which are shown in the table below.

Recent Price Behavior: Nautilus Navigation

$14 (8/15/16) $18.55 $20 $17.50

$14.25 $17.50 $20.21 $18.55

$14.79 $17.50 $20.25 $19.80

$15.50 $17.25 $20.16 $19.50

$16 $17 $20 $19.25

$16 $16.75 $20.25 $20

$16.50 $16.50 $20.50 $20.90

$17 $16.55 $20.80 $21

$17.25 $16.15 $20 $21.75

$17.20 $16.80 $20 $22.50

$18 $17.15 $20.25 $23.25

$18 (9/30/16) $17.22 $20 $24

$18.55 $17.31 (10/31/16) $19.45 $24.25

$18.65 $17.77 $19.20 $24.15

$18.80 $18.23 $18.25 (11/30/16) $24.75

$19 $19.22 $17.50 $25

$19.10 $20.51 $16.75 $25.50

$18.92 $20.15 $17 $25.55 (12/31/16)

Nautilus shares are actively traded on the Nasdaq Global Market and enjoy considerable market interest.

Questions

1. Use the closing share prices in the table above to compute the stocks relative strength index for (1) the 20-day period from 9/30/16 to 10/31/16; and (2) the 22-day period from 11/30/16 to 12/31/16. [Hint: Use a simple (unweighted) average to compute the numerator (average price change on up days) and denominator (average price change on down days) of the RSI formula.]

1. Contrast the two RSI measures you computed. Is the index getting bigger or smaller, and is that good or bad?
2. Is the latest RSI measure giving a buy or a sell signal? Explain.

2. Based on the above closing share prices, prepare a moving-average line covering the period shown in the table; use a 10-day time frame to calculate the individual average values.

1. Plot the daily closing prices for Nautilus from 8/15/16 through 12/31/16 on a graph/ chart.
2. On the same graph/chart, plot a moving-average line using the individual average values computed earlier. Identify any buy or sell signals.
3. As of 12/31/16, was the moving-average line giving a buy, hold, or sell signal? Explain. How does that result compare to what you found with the RSI in part a? Explain.

Based on the technical measures and charts youve prepared, what course of action would you recommend that Brett take with regard to Nautilus Navigation? Explain.