Envelopes

An Envelopes is forms by constructing symmetrical lines parallel to an moving average.

It has already been established that Moving Averages can act as important juncture points in their roles as support and resistance areas. In this respect, the longer the time span, the greater the significance of the average. This support and resistance principle can be taken one step further by constructing symmetrical lines parallel to an Moving Average called envelopes.

This technique is based on the principle that stock prices fluctuate around a given trend in cyclical movements of reasonably similar proportion. In other words, just as the Moving Average serves as an important juncture point, so do certain lines drawn parallel to that Moving Average. Looked at in this way, the Moving Average is really the center of the trend, and the envelope consists of the points of maximum and minimum divergence from it.

There is no hard and fast rule about the exact position at which the envelope should be drawn, since that can be discovered only on a trial-and-error basis with regard to the volatility of the price being monitored and the time span of the Moving Average. This process can be expanded, to include four or more envelopes (that is, two above and two below the Moving Average), each drawn at an identical proportional distance from its predecessor.