A simple moving average line can be enhanced by surrounding the line pattern with parallel envelopes. These envelopes deviate from the the moving average line by a user-specified percentage in order to determine when prices have strayed from the moving average line by that percentage. For example, charting 3% envelopes would display an upper parallel line that is 3% above the MA line, and a lower parallel line that is 3% below the MA line.
Example
Cisco Systems, Inc. (CSCO) MA Env example chart from StockCharts.com
The chart for Cisco (CSCO)[Csco] shows 3% envelopes placed around a 20-day moving average of the security. Notice how during the downtrend the upper envelope was never touched, while the lower envelope was touched repeatedly.
Moves outside of the 3% envelopes are significant for short term traders who are more concerned with smaller price fluctuations. A short term analysis would see prices outside of the 3% envelopes as overextended. On the other hand, a long range analysis might focus on prices outside of 5% or 10% envelopes that surround a 10-week or 40-week average.
Source:http://stockcharts.com/
