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  • 1. GMASS Technical Indicators www.DowDecoded.com
  • 2. Table of Contents BETA............................................................................................................................................................................ 2 COPPOCK ..................................................................................................................................................................... 2 CORRELATION ............................................................................................................................................................. 3 MACD (MOVING AVERAGE CONVERGENCE DIVERGENCE) ........................................................................................ 3 MEISELS ...................................................................................................................................................................... 3 MOMENTUM ................................................................................................................................................................ 3 OSCILLATOR ................................................................................................................................................................ 4 POINT AND FIGURE ...................................................................................................................................................... 4 PRICE RATE OF CHANGE .............................................................................................................................................. 5 RELATIVE STRENGTH INDEX (RSI) .............................................................................................................................. 5 STANDARD DEVIATION ................................................................................................................................................ 5 STOCHASTIC OSCILLATOR ........................................................................................................................................... 6 TICKS ........................................................................................................................................................................... 6 TRIX ........................................................................................................................................................................... 6 VERTICAL HORIZONTAL FILTER (VHF)....................................................................................................................... 7 VOLATILITY ................................................................................................................................................................. 7 WILLIAMS %R INDICATOR ........................................................................................................................................... 7 ACCUMULATION / DISTRIBUTION................................................................................................................................. 8 CHAIKIN OSCILLATOR ................................................................................................................................................. 8 COMMODITY CHANNEL INDEX (CCI) .......................................................................................................................... 9 DIRECTIONAL MOVEMENT........................................................................................................................................... 9 EASE OF MOVEMENT ................................................................................................................................................. 10 EQUIVOLUME ............................................................................................................................................................. 10 MASS INDEX .............................................................................................................................................................. 10 MONEY FLOW INDEX ................................................................................................................................................. 11 NEGATIVE VOLUME INDEX ........................................................................................................................................ 11 ON BALANCE VOLUME .............................................................................................................................................. 11 POSITIVE VOLUME INDEX .......................................................................................................................................... 12 SWING ACCUMULATION INDEX ................................................................................................................................. 12 SWING INDEX............................................................................................................................................................. 13 ABSOLUTE BREADTH INDEX ...................................................................................................................................... 14 ADVANCE/DECLINE LINE .......................................................................................................................................... 15 ADVANCE/DECLINE RATIO ........................................................................................................................................ 15 BREADTH THRUST ..................................................................................................................................................... 16 MCCLELLAN OSCILLATOR......................................................................................................................................... 16 MCCLELLAN SUMMATION INDEX .............................................................................................................................. 17 NEW HIGHS-NEW LOWS ............................................................................................................................................ 17 NEW HIGHS-NEW LOWS CUMULATIVE ...................................................................................................................... 18 NEW HIGHS/NEW LOWS RATIO ................................................................................................................................. 18 OVERBOUGHT/OVERSOLD ......................................................................................................................................... 19 STIX.......................................................................................................................................................................... 19 ANDREWS' PITCHFORK .............................................................................................................................................. 21 FIBONACCI ARC ......................................................................................................................................................... 21 FIBONACCI FAN ......................................................................................................................................................... 21 FIBONACCI RETRACEMENT ........................................................................................................................................ 21 GANN ANGLES ........................................................................................................................................................... 22 PARTIAL TREND......................................................................................................................................................... 22 QUADRANT LINES ...................................................................................................................................................... 22 SPEED RESISTANCE LINES ......................................................................................................................................... 22 MOVING AVERAGES ................................................................................................................................................... 23 SIMPLE MOVING AVERAGE........................................................................................................................................ 23
  • 3. EXPONENTIAL MOVING AVERAGE ............................................................................................................................. 23 TRIANGULAR MOVING AVERAGE .............................................................................................................................. 23 VARIABLE MOVING AVERAGE ................................................................................................................................... 24 WEIGHTED MOVING AVERAGE .................................................................................................................................. 24 CHANNELS ................................................................................................................................................................. 25 ENVELOPES (TRADING BANDS) ................................................................................................................................. 25 BOLLINGER BANDS .................................................................................................................................................... 25 TREND LINES ............................................................................................................................................................. 26 CORRELATION ........................................................................................................................................................... 27 EQUIVOLUME ............................................................................................................................................................. 28 OVERBOUGHT ............................................................................................................................................................ 28 PE.............................................................................................................................................................................. 28 STOP-LOSS ................................................................................................................................................................. 29 TRADING.................................................................................................................................................................... 29 VOLATILITY ............................................................................................................................................................... 29 VOLUME .................................................................................................................................................................... 30 YIELD ........................................................................................................................................................................ 30 RIGHTS ISSUE ............................................................................................................................................................ 30
  • 4. How to use Adobe Reader This PDF manual is more than just a convenient way of reading your document on screen. You get some superb ways of navigation that you’ll never see in a printed book or even a webpage, using the Contents and Index. Your Acrobat Reader program may have already automatically opened your manual. Here’s how to change your viewing size settings: Changing the size of your PDF page. You have 2 ways to do this: 1) Sizing At the bottom of your Acrobat Reader screen, you’ll see these sizing controls. Click the one on the left (shown with the cursor on the control) to change the screen size more accurately. 2) Icons At the top of the Reader screen, you’ll see 3 icons. Click on each one of these in turn and discover how the page increases and decreases in size. Choose one that’s comfortable for your viewing.
  • 5. Navigation Panel Your screen may open with the bookmark panel open on the left-hand side of your screen. If this takes up too much screen; you can close it using the Navigation Panel icon. Turning Pages There are 4 ways to turn a PDF file page. 1) Use the Arrow keys on your keyboard. Use either Forward or Back or Up and Down . 2) Use the scrolling bar on the right-hand side of your screen. Notice that when you click your cursor on the scroll button, the page number is revealed in a small window close by it. 3) Bottom panel operation. By using either side of the page counter window, you can ‘turn’ the page forward or back.
  • 6. 4) Arrow icons on the top toolbar Click on these icons to move forward or back. 5) Returning To Previous Pages Clicking on this icon, on the top toolbar, will return you to the previous page view, keeping your original page size the same.
  • 7. Indicators Analytic Indicators Analytic indicators are part of Technical Analysis. They are generally derived from a single share’s price and are believed to reveal nuances in the share’s behaviour. Many believe they can be used to predict the future movement of the price, although there is little consensus as to exactly how. Beta The beta of a share is a measure of the degree to which it is expected to rise and fall in proportion with the rise and fall of an index share. It gives an indication of how in step with the index share it is. If the number is greater than one then, on past performance, it is expected to go up faster than the index share when the index share is going up and go down faster when the index share is going down. If the Beta is low then it indicates that the share price is largely independent of the movement of the index share. Mathematically it is the (standard deviation of the share) x (correlation of the share with the index share) / (standard deviation of the index share). Coppock The Coppock is a long-term momentum indicator developed by Edwin Coppock. It is based on the idea of applying crowd psychology to the stock market. It’s based on a 10 month moving average of how much a share has moved in the previous 11 and 14 month periods, the 11 and 14 months coming from the idea that this is the average time that people take to overcome traumatic events. Coppock provided a simple rule with his indicator: "Buy when it moves up whilst below zero". In other words a ‘buy’ signal is generated if the share starts to move up while below the origin. However DOWDECODED.COM 2
  • 8. such signals are not always common and so a more general rule has been to take the graph turning up above the origin to be ‘weak buy’ signals. Because of its long term nature this indicator needs 24 months of data before it can be calculated. Correlation Correlation is a measurement of the correlation of the price of a given share compared to an index share. The value lies between 1 and -1. 1 means that the price is totally in step with the index share. If a share has a high correlation, say over 0.6, it means it is more likely to be marked up (or down) just because the index share moves up (or down). MACD (Moving Average Convergence Divergence) MACD is an oscillator that is calculated by taking the difference between two exponential moving averages. Traditionally, when the MACD is below the origin the share is considered to be over-sold, and when above the origin to be overbought. When the MACD is oversold (i.e. below the origin) and crosses above the signal graph then it is generally believed to be an indication to buy. An overbought MACD (i.e. above the origin) crossing to below the signal graph is generally considered to be signal to sell. The further from the origin, the stronger the signal is considered. Meisels The Meisels indicator is a short-term indicator that is often applied to market indices, acting as a simple market graph. It is based on the moves a share made over the previous 10 days. For each rise a 1 is given and for each fall a -1. Values above 6 are considered to be especially significant, indicating a stronger upward or downward run perhaps suggesting a potential reversal. Momentum This indicator measures the share price change over a number of trading days. DOWDECODED.COM 3
  • 9. Turning points are regarded by some as a good time to buy (low momentum) or sell (high momentum). It is calculated as follows: Momentum = (Today's close / Close n periods ago) x 100 where…. n is the set time period Oscillator The Oscillator is a simple indicator that is based on the closing price. It tries to discount long-term trends, thereby making it easier to pick out shorter cycles in the price movement and to identify overbought and oversold levels. The oscillator follows the closing price movements - but longer trends are ignored. This is achieved as the calculation of each day's Oscillator value uses the price but discounts a previous simple moving average value: Oscillator = Close Price - lagged Moving Average (n) where…n = the period of the lagged moving average (i.e. number of days) Point and Figure A Point and Figure indicator displays the changes of a share’s price and completely ignores the passage of time. The indicator works by displaying columns of X’s and O’s. Each column may only consist of X’s or O’s. For a column of X’s, each X means that the share’s price has increased by an amount equal to the ‘box size’. Alternatively for a column of O’s, each O means that the share’s price has decreased by an amount equal to the ‘box size’. Each column alternates between X’s and O’s, a change from one column to the next occurring only when the price reverses by an amount equal to the ‘box size’ multiplied by the ‘reversal amount’. Point and Figure attempts to display the underlying supply and demand of a share’s price. A distinct column of X’s suggests that demand is exceeding supply or that a rally is occurring, while a distinct column of O’s suggests that supply is exceeding demand or that a decline is occurring. Finally a series of short columns suggests that supply and demand are relatively equal. DOWDECODED.COM 4
  • 10. Price Rate of Change The Price Rate of Change indicator shows the difference between a share’s current price and the share’s price n days ago. The Price Rate of Change attempts to capture the cyclic nature of a share’s price. The most popular time periods for this indicator are 12 days and 25 days, which act as a short to intermediate term overbought / oversold indicator. Higher values of this indicator imply that a share is more overbought, while lower values imply that a share is more oversold. High and low values also imply that a share’s price will turn, although extreme values may well indicate a continuing trend. Relative Strength Index (RSI) The RSI indicator measures a share’s performance against itself. It is often used in identifying buying opportunities in market dips, and selling opportunities in market rallies. The value of the RSI is always a number between 0 and 100. • A low number indicates a more oversold market • A high value indicates a more overbought market. The higher and lower horizontal lines on a RSI graph are usually set at 30 and 70, which are the levels at which shares are often regarded as overbought or oversold. Use the following formula for RSI: RSI = 100 - ( 100 / (1 + ( U / D )) ) where…. U = Average upwards price movement over the period D = Average downwards price movement over the period The 'exponential' setting applies an exponential moving average to the line; the time period of the average being the same as that of the RSI setting. Standard Deviation The standard deviation indicator displays how the n-day standard deviation of a share’s unadjusted price changes over time. The standard deviation is a measure of a share’s volatility. A high value will occur when the value of a share changes greatly, while a low value can be expected while the share remains relatively static. DOWDECODED.COM 5
  • 11. Stochastic Oscillator The Stochastic Oscillator is designed as an indicator of when the market is overbought and oversold. It is based on two lines called %K and %D. The main indicator line is the %K, and is an indication of where the share lies respective to the highest and lowest prices in the given time period. The %D is the signal line, and is a moving average of the %K line. It’s calculated as follows: %K = ( (Today's close - Lowest Low in %K periods) / (Highest high in %K periods - Lowest Low in %K periods) ) x 100 There have been a number of possible interpretations of how to use the Stochastic Oscillator, including: 1. That a ‘sell’ signal is generated when the two lines cross above the 75% mark, and a ‘buy’ signal is generated when the two lines cross below the 25%. 2. That a ‘buy’ signal is generated when either of the lines falls below a given mark (i.e. the 25% mark) and then rises above that same mark. For this method a ‘sell’ signal is then generated when either of the lines rises above a certain mark (i.e. the 75% mark) and then falls below that mark. This method works best in non-trending markets. 3. That a ‘buy’ signal is generated when the %K line rises above the %D line, and then a ‘sell’ signal is generated when the %K line falls below the %D line. This indicator tends to generate false buys and sells, and so is traditionally used in conjunction with other indicators. Ticks A 'tick' is recorded every day and is +1 if the price moves up and -1 if the price moves down, regardless of the degree of movement. In other contexts it is the minimum change in a price. It therefore shows the general direction of a share's price movement over time. TRIX The TRIX indicator is a momentum indicator displaying the percentage rate of change of the share price after applying three successive exponential moving averages. The aim of the TRIX is to track trends that are at least the specified period in length. DOWDECODED.COM 6
  • 12. The TRIX tends to be plotted with a 9 day signal line to help in its interpretation. There are a couple of popular methods used to interpret the TRIX. 1. To buy shares when the price turns up and to sell when it turns down. 2. To buy shares when the TRIX rises above its signal line and sell when it falls below the signal line. As with many such momentum indicators, the TRIX indicator works best in trending markets. Vertical Horizontal Filter (VHF) The Vertical Horizontal Filter (VHF) is a volatility index that provides an indication as to whether a share is in a trending or trading phase. It is generally taken that higher values of the VHF suggest that a share is in a trending phase, while lower values suggest a trading phase. Alternatively, when the VHF rises it is generally taken to indicate that the share is entering a trending phase, and when the VHF falls that the share is entering a trading phase. The Vertical Horizontal Filter is calculated as follows: VHF = Numerator / Denominator where…. Numerator = Absolute value of (HCP-LCP) HCP = Highest closing price in n periods LCP = Lowest closing price in n periods Denominator = Sum of the absolute daily price change for n periods Volatility The volatility indicator measures the degree of movement, up or down, of a share price. The more rapid the movement, the greater the volatility. Higher volatility is generally believed to indicate higher risk. An ideal share has high growth with low volatility. Williams %R indicator The Williams %R indicator is a momentum indicator measuring the overbought/ oversold levels of share’s price. DOWDECODED.COM 7
  • 13. When the indicator lies in the upper range between 80 and 100 percent then this is taken as a sign that the share is oversold. When the indicator lies between the range 0 to 20 percent then this is taken as an indication that the share is overbought. It is generally considered that a price reversal will generally follow if a share is overbought or oversold. Accumulation / Distribution This is a momentum indicator that shows the relationship between the share price and the trading volume. Similar to the On Balance Volume indicator, an upward trend results from more investors buying than selling because more of the traded volume is associated with buys. Similarly, if volume is flowing away from a share, more investors are selling than buying and the accumulation/distribution indicator will move downwards. The difference in movement between the indicator and the share price can be used to foresee changes in price direction. For example, if the accumulation/distribution is moving down whilst the price is going up, one may expect the price direction to change in order to come into agreement with the indicated flow of volume. This indicator is calculated by adding or subtracting part of the day's volume figure from the cumulative total of volume for the share according to the day's price movement. The closer the day's closing price is to the day's price high, the larger the portion of the day's volume figure will be added to the cumulative total (giving an upward movement); and the closer the closing price is to the day's low, the larger the portion of the day's volume will be subtracted from the total (a downward movement). Chaikin Oscillator This oscillator is calculated using the difference between two exponential moving averages of the share's accumulation/distribution (a 10 day line minus a 3 day line). One way to interpret the line is to say that a change in direction signals a turning point in the price giving a buy or sell signal. This refers back to how the accumulation/distribution of volume relates to short and mid term price movements. It is dependent on the trend of the share at the time; if, for example, a share is trending upwards, then a buy signal may be given by the oscillator turning upwards as long as it is below zero. DOWDECODED.COM 8
  • 14. Similarly, if the indicator turns downwards whilst above zero and the share is trending downwards, then this gives a signal to sell. Another way of using the Chaikin oscillator is to use it to help see short and mid term peaks and troughs in price as the volume to price movement shown by this indicator can be compared with the price movements. For instance, if the price is rising to a high and the oscillator is falling, this may signal an imminent fall in price. Commodity Channel Index (CCI) The CCI shows the difference between a share's current price and its average price. So a high value indicates that the current price is much higher than its usual level and a low value shows that the price is far below its usual level. This can therefore be used as an overbought/oversold indicator where typically, readings above +100 imply the share is overbought and a value below -100 implies it is oversold. Directional Movement The Directional Movement indicator contains several options comprising a system of lines. Taking each day's high and low prices, directional movement is given by looking at the largest section of today's high/low range that is above or below yesterday's range. For example, if today's high is four pence above yesterday's and today's low is one penny below yesterday's, the directional movement uses the four pence as this is the larger of the two; and further, as this difference is above yesterday's range, the directional movement is positive (and if the larger difference was below yesterday's high/low range, the directional movement is negative). The Average Directional Index (ADX) looks at the difference between positive and negative directional movement over time and calculates a value between 0 and 100 where lower values indicate non-directional movement (e.g. sideways movement) and higher values indicate a stronger directional movement (where the difference between the average positive and negative directional movement is largest). The Average Directional Index Rating (ADXR) is the final figure reached using these concepts. It is the average of the ADX today and the ADX fourteen days ago. Therefore, it gives a measure of the amount of directional movement but is less effected by changes and equilibrium points in directional movement. DOWDECODED.COM 9
  • 15. There are a number of ways of reading combinations of these lines and tracking different situations that may point to changes in trends and in short term price movement. Ease of Movement This oscillator shows the link between changes in price and volume. Higher values are given when the share price is rising and the volume is low. Lower values appear when the price is falling and the volume is low. If volume is high, or prices are fairly static, then the Ease of Movement value will be close to zero. This indicator can be used to show buy and sell signals. If the indicator is moving upwards through zero, then prices are moving up easily and this gives a buy signal. Similarly, if the indicator moves down through zero, prices are falling easily and it may be time to sell. The line is smoothed using a moving average and you can set the period of this. Equivolume Equivolume combines price and volume information, displaying these as a single box. The top and bottom levels of each box in the indicator chart show the price high and low for the period and the width of the box represents the volume for the period (if volume is very low, the box is so narrow it appears as a spike). As the width of each box varies with volume rather than with time, the horizontal scale of the indicator adjusts according to the traded volume. The option to draw this as a candle volume chart gives an alternative display aspect to the indicator - showing the OHLC price movement for each period. Mass Index This indicator measures the change in the range of high and low prices and these changes are seen to indicate reversals in price trends. If the difference, or gap, between daily high and low prices increases, the value of the Mass Index increases and vice versa. Donald Dorsey, who devised this indicator, claimed the pattern to look for is a 'reversal bulge' which occurs when the value of the indicator rises above 27.0 and then drops below 26.5. He said this indicates a likely change in the direction of the price movement. A 9 day exponential moving average is used in calculation of this indicator and following this, the direction of a 9 day exponential moving average of the DOWDECODED.COM 10
  • 16. price line may be used to determine whether the 'reversal bulge' is signalling a buy (if moving down) or a sell (when the MA is moving up). Money Flow Index This momentum indicator takes volume and high, low and close prices into account to give an idea of the strength of the traded volume to and from a share. The precise calculation of this indicator is too extended to be included here but in general, a share's peak is seen as being indicated when the Money Flow Index is greater than about 80 and is possibly towards its lowest price when the value is below around 20. A second interpretation can be found by looking for where the price trend is in the opposite direction to the trend of this indicator. This may indicate a forthcoming reversal in the price trend. Negative Volume Index This is often used to indicate a bull market. The theory behind this indicator is that more important trades take place, or are visible, on days where the volume is lower than the preceding day (as increases in volume are seen to involve more and more traders following the herd rather than the trades on quieter days which may be based on greater understanding). This contrasts the volumes that are picked out by the Positive Volume Index It is commonly read that where the index rises above its one year moving average, this strongly indicates a bull market. As falling prices are often linked to drops in volume, the NVI commonly has a downward trend. On Balance Volume This momentum indicator shows how volume is flowing into or out of a share. It is generally considered that changes in OBV can indicate forthcoming changes in price. Volume is described as flowing into a share if the day's closing price is higher than the previous day's (up-volume) and conversely, if the share closes at a lower price than the day before, volume is seen as flowing out (down-volume). OBV is calculated by adding or subtracting the day's volume figure from the cumulative total of volume for the share according to the day's price movement: if the share price is higher than the preceding day, today's volume DOWDECODED.COM 11
  • 17. is added to yesterday's OBV figure; and if the share price is lower than the preceding day's, today's volume is subtracted from yesterday's OBV. So an upward trend in OBV may precede an increase in price as more and more investors purchase the share. When an OBV trend changes, this may indicate a corresponding breakout in the share price. In the short term, OBV trends are seen to continue until either the trend reverses, or there is sideways movement for more than three days (i.e. movement without any dominant direction). Positive Volume Index This indicator can be used to identify bull or bear markets. The PVI gives an idea of what the general crowd are doing by giving more importance to days where the traded volume is greater than the preceding day. It is commonly read that where the index is above its one year moving average, there is a good chance that there is a bull market and where the index is below its one year moving average there is a slight or fair chance that there is currently a bear market. This contrasts the volumes that are picked out by the Negative Volume Index. As rising prices are often linked to increases in volume, the PVI commonly has an upward trend. Swing Accumulation Index The Swing Accumulation Index is formed by adding or subtracting the day's calculated Swing Index value to the previous cumulative total value of the Swing Index. This indicator therefore looks at the relationships between OHLC (Open, High, Low, Close) prices between one day and the next by giving each short term price swing a numerical value. The accumulated index therefore 'simplifies' a OHLC chart by providing a breakdown of the daily price variation. In forming a single value, reached by giving proportional significance to the variations in day to day OHLC figures, the Swing Accumulation Index seeks to pick out the real direction of the market. By giving a clearer view of short term price fluctuation, trends and other patterns may be easier to spot. DOWDECODED.COM 12
  • 18. Swing Index This indicator, primarily used for calculating the Accumulation Swing Index, looks at the relationship between the Open, High, Low and Close prices for the current day and those of the previous day. By comparing the values of a range of combinations of prices across today and yesterday (yesterday's High to today's Low, yesterday's Close to today's Open, Low to Close etc.) and proportioning these differences, the indicator is seen to pick out short term swings in the price (simplistically, larger index values are given by more extreme price fluctuation). DOWDECODED.COM 13
  • 19. Market Graphs Market graphs are similar to indicators except that they are used to examine the entire market (or part of it) rather than just a single share. Market graphs were originally developed using the Dow Jones Industrial Average. Many investors believe these graphs can be used to predict the future movement of the market by revealing nuances in the market's behaviour. However, as with most analysis techniques, arguments exist both for and against the benefits of these tools. Absolute Breadth Index The Absolute Breadth Index (ABI) market graph is a market momentum indicator. What it shows: The ABI shows the levels of volatility of a market. That is, it provides a measure of how prices are changing, but ignores the direction of price movements. How it is calculated: ABI = (Number of shares rising) - (Number of shares falling) Only the absolute value is used. For example, in the FTSE 100, if 11 share prices increased and 89 share prices decreased, the ABI would be 78 (ABI = 11 - 89 = -78 but the +/- sign giving the direction of the movement is ignored). How it may be read: High values indicate that there is an active market in flux, while low values indicate a lack of change and a relatively stable market. Also, it may be seen that higher ABI values may lead to higher prices several months later. One consideration in reading this line is that when looking at an entire market, the number of shares added to or removed from the market has to be taken into account. For instance, a large rise in the number of shares making up the market would show as an increase in the ABI. At times, therefore, if the number of shares in issue has changed greatly, only the relatively more recent values of the ABI may provide meaningful and relevant comparison. DOWDECODED.COM 14
  • 20. Advance/Decline Line The Advance/Decline Line (A/DL) is one of the more popular market graphs. An indicator that includes measurement of advancing and declining shares is known as a market breadth indicator. What it shows: The A/DL indicates the overall strength of a market or of a market trend by measuring the number of shares advancing (rising) and declining (falling). How it is calculated A/DL = Yesterday's A/DL + ((Number of shares rising) - (Number of shares falling)) The A/DL always starts at zero. How it may be read: The actual values of the A/DL are not really significant. What are important are any trends and patterns in the line. The trend of the A/DL can indicate whether the market as a whole is rising or falling and can also give some idea of the strength of a market trend. General movement by the A/DL in the opposite direction to the index of the market it is measuring can also be significant and may be used to predict changes in the market trend. Advance/Decline Ratio The Advance/Decline Ratio (A/DR) looks at advancing (rising) and declining (falling) shares. What it shows: The A/DR shows the ratio of advancing to declining shares. How it is calculated: A/DR = Number of advancing shares / Number of declining shares How it may be read: The Advance/Decline Ratio, or a moving average of it, can be used as an overbought / oversold indicator. For instance, relatively high values may imply the market is overbought suggesting a higher chance that prices will be corrected downwards - the higher the value, the more excessive the rally may be. Similarly, lower A/DR values may imply a forthcoming rise in prices. Note, however, that overbought/oversold indicators can remain relatively static for a while with only subsequent price movements giving confirmation of the indication. DOWDECODED.COM 15
  • 21. Breadth Thrust The Breadth Thrust (BT) market graph is a market momentum indicator. What it shows: The BT line indicates rapid upward movements ('thrusts') in the market which may show the start of a bull market. A 'thrust' is defined as where the market has moved from an oversold condition very quickly but has not yet reached an overbought state. How it is calculated: The BT is an exponential moving average of a ratio looking at rising (advancing) and falling (declining) shares. BT = 10 day EMA of (Number of advancing shares) / (Number of advancing shares + Number of declining shares) How it may be read: The key levels to watch for indication of a 'thrust' are 40% and 61.5%. Whilst the line may move through these levels fairly often, the 'thrust' is only shown when the line moves from below 40% to above 61.5% within a 10 day period. Such a movement would suggest a strong rally or the start of a significant bull market. McClellan Oscillator The McClellan Oscillator is a popular market graph looking at share price movements. This is known as a market breadth indicator. What it shows: This oscillator shows the difference between the number of advancing (rising) and declining (falling) shares in the market. How it is calculated: The McClellan Oscillator is calculated as the difference between a 10% and a 5% exponential moving average (EMA) of advancing minus declining shares. McCl. Osc. = (10% EMA of (Advances - Declines)) - (5% EMA of (Advances - Declines)) • A 10% EMA is approximately equal to a 19 day EMA. • A 5% EMA is approximately equal to a 39 day EMA. How it may be read: Oscillator values between 70 and 100 may suggest an overbought market. And values between -70 and -100 may suggest an oversold market. That is to say, when the oscillator rises up through -70, this may be seen as a buy signal and when the oscillator falls down through 70, this may be seen as a sell signal. DOWDECODED.COM 16
  • 22. Values above 100 or below -100 indicate the extremes of these conditions. These sorts of readings often indicate a continuation of a trend. However, if these more extreme values are present, one may wish to wait for further measurements by the oscillator to confirm the market position. McClellan Summation Index The McClellan Summation Index is a form of breadth indicator providing a longer term version of the McClellan Oscillator. What it shows: This summation index picks out the longer term changes in market trends. How it is calculated: This summation index is a cumulative sum of the oscillator. Today's McCl. Summ. = Yesterday's McCl. Summ. + Today's McCl. Osc. How it may be read: This summation index can be seen to indicate turning points at peaks and troughs in the market. • When the indicator falls below -1300 then a ‘major’ bottom may occur. • When the indicator diverges with the market index at values greater than +1600 then a ‘major’ top may occur. Also, the start of a strong bull market may be implied if a rise of 3,600 or more from a previous low occurs and this rise breaks through the +1,900 mark. New Highs-New Lows The New Highs-New Lows (NH-NL) market graph looks at the difference between how many shares are at a price high and those that are at a price low. What it shows: The NH-NL shows the difference between the number of highs and lows at any point. The movement of this line can therefore measure the strength of the market, or the direction in which it may be heading. How it is calculated: NH-NL = (Number of New Highs) - (Number of New Lows) where….highs/lows are based over a one year period How it may be read: The NH-NL indicator can be read in two ways. DOWDECODED.COM 17
  • 23. 1. The NH-NL line oscillates around zero. If the line is above zero, there are more new highs than new lows which shows a more bullish market. Conversely, below zero, the market may be seen to be more bearish. 2. It can be seen that the NH-NL line tends to fall sharply and hit extreme lows shortly before the market does. If the NH-NL line then jumps up quickly, this indicates the market has probably bottomed out (as at least some shares are recovering, although of course it is easier for a share to reach a new high if the prices have been low for a long period). The trend of the NH-NL line can then be used as an aid to assess the strength of a market trend. For instance, if market indices are rising, but the NH-NL line is trending downwards, this may indicate the market trend is weak, or is likely to reverse. New Highs-New Lows Cumulative The New Highs-New Lows Cumulative market graph is a long term momentum indicator. What it shows: The NH-NL Cumul. shows the strength of a market trend by confirming the trend, or not. How it is calculated: Today's NH-NL Cumul. = Yesterday’s NH-NL Cumul. + (Number of New Highs - Number of New Lows) where….highs/lows are based over a one year period. How it may be read: Generally this market graph is used to validate the current market trend. Much of the time the NH-NL Cumul. line will move in the same direction as the market. However, when it moves in the opposite direction for a period, this shows a weakness in the market trend and may suggest a forthcoming reversal. New Highs/New Lows Ratio The New Highs/New Lows Ratio market graph is the ratio of the number of shares reaching new year highs and the number of shares reaching new lows. What it shows: The NHNL Ratio shows the relationship between shares reaching new highs and those reaching new lows. How it is calculated: NHNL Ratio = Number of New Highs / Number of New Lows How it may be read: DOWDECODED.COM 18
  • 24. This graph tends to peak in periods when a relatively large number of shares are making new highs, suggesting a bullish market. And when more shares are making new lows, this graph will be relatively flat at around zero (or show readings of less than 1). So while a flat, low line may suggest or be present during a downward trend in the market, if the market was trending upwards, a flat line would indicate weakness in that trend. Overbought/Oversold The Overbought / Oversold (OB/OS) market graph is a breadth thrust market indicator. What it shows: The OB/OS graph shows the difference between the number of advancing (rising) and declining (falling) shares. How it is calculated: The OB/OS line is an exponential moving average of the difference between the number of advancing and declining shares. OB/OS = 10 day EMA of (Number of advancing shares - Number of declining shares) How it may be read: Overbought/oversold values of above +200 suggest that the market is in a bearish state, while values of below -200 are considered to be bullish. So these levels could be used as buy or sell signals; if the OB/OS line moves up through -200 that may be seen as a buy signal, and if it drops down through 200, that may be a sell signal. STIX The STIX market graph is a short term oscillator based on the Advance/Decline Ratio What it shows: The STIX line shows a smoothed version of the Advance/Decline Ratio. How it is calculated: The STIX graph is a 9 percent exponential moving average of the Advance/Decline Ratio. Today's STIX = (Today's A/DR * 0.09) + (Yesterday's A/DR * 0.91) A 9 percent EMA is approximately equal to a 21 day EMA. How it may be read: For STIX values, the levels of 42 and 56 are seen as significant. DOWDECODED.COM 19
  • 25. Unless the market is in a strong decline, values below 45, and more so below 42, indicate the market is oversold, perhaps giving a buy signal. Similarly, a sell signal may be seen as when the STIX value rises above 56 (showing the market is overbought), unless this happens during a new bull market. DOWDECODED.COM 20
  • 26. Line Studies Line studies are applied to the graph of one share. They attempt to bring out information about a share’s price. Most are based on the principle of support and resistance. Andrews' Pitchfork Andrews' Pitchfork is composed of three parallel trend lines. Choose three points on a graph. The first should be a major peak or trough towards the start or left hand side of the graph. The other two points should be set at a peak and a trough after the first point (i.e. to its right). The pitchfork appears automatically when you click on the third point. The interpretation of a pitchfork is based on normal trend line support and resistance principles. Fibonacci Arc Fibonacci Arcs are used to anticipate the changes in trends near the arcs. As the price approaches the arcs, so it is ‘anticipated’ that the arcs will provide resistance and support to the share price. Commonly one displays both Fibonacci Arcs and Fibonacci Fan Lines to anticipate support/resistance where the two studies cross. Fibonacci Arcs are formed by drawing three half circles crossing a line at the 38.2 percent, 50.0 percent and 61.8 percent mark respectively. Fibonacci Fan Fibonacci Fans are used to anticipate the changes in trends near the fan lines. As the price approaches a fan line, so it is ‘anticipated’ that the fan line will provide resistance and support to the share price. Commonly one displays both Fibonacci Fan Lines and Fibonacci Arcs to anticipate support/resistance where the two studies cross. Fibonacci Fans are drawn from a control line. From the end of the control line an invisible line is drawn down and then lines are drawn to divide the vertical line at the Fibonacci levels of 38.2 percent, 50.0 percent, and 61.8 percent. Fibonacci Retracement Fibonacci Retracements are used to anticipate the changes in trends near the retracement lines. First a control trend line is drawn and then a series of nine horizontal lines are drawn intersecting the trend line at the Fibonacci levels of DOWDECODED.COM 21
  • 27. 0, 23.6 percent, 38.2 percent, 50 percent, 61.8 percent, 100 percent, 161.8 percent, 261.8 percent and 423.6 percent. It has been observed that after a large price change, prices tend to retrace a portion of the original move. Fibonacci Retracements aim to anticipate where the price will receive support and resistance of the price as it retraces the original change. Gann Angles Gann Angles are a series of lines based on an initial trend line drawn between a major low and a major high point in a share’s price. First the trend line is drawn, and then four lines on either side are drawn at the Gann Angles (7.5 degrees, 15 degrees, 18.75 degrees and 26.25 degrees for a 45 degree trend line). It is then anticipated that the share’s price will gain support and resistance from these lines. The idea is that as a price reaches one of the lines it will take a number of attempts to cross it before dropping down to the next line where the process occurs again. Partial Trend The partial trend line is a version of the trend line that can be applied over a selected region of a share. It provides a straight line that best fits the share within the selected region. The confidence lines indicate how definite the trend is. The closer the confidence lines are, the stronger the trend. This line study can not be used in analytic windows or the volume histogram. Quadrant Lines Quadrant Lines provide assistance in examining the price movement of a share over any selected period. They divide the selected region of the share’s price into 4 equal sections between the highest and lowest prices. Speed Resistance Lines Speed Resistance Lines are a series of trend lines that divide a price movement of a share into three equal sections. Generally the ‘control’ line is drawn between two extreme prices - between a low point and an opposing high point. The two lines below the 'control' can sometimes be seen as the levels at which prices find support following this high point. Whilst the second (middle) line may show one support level, if the prices drop below the middle line, one might expect prices to continue to fall until the bottom line is hit, at which point they may stop falling. The bottom line may then show another support level. DOWDECODED.COM 22
  • 28. Moving averages The moving average indicator is the arithmetic average of the prices of the selected range of days. It plots the moving average for the price and date range chosen. There are a number of variations to calculate a moving average: Simple; Exponential; Triangular; Variable; Weighted. There are a number of ways to interpret a moving average, but generally prices above the moving average indicate a bullish trend, and prices below the moving average indicate a bearish trend. Simple Moving Average A simple moving average gives equal weight to each share price. A simple moving average is calculated by summing the price of the financial instrument over a set number of time periods, and dividing this total by the number of time periods. Exponential Moving Average An exponential moving average places more weight on the most recent security price. An 8% exponential moving average is calculated as follows: (Share price x 0.08) + (Yesterday’s Moving Average x 0.92) This percentage figure can be converted to the time period (i.e. the number of days) as follows: (2 / 0.08) - 1 = 24 days (2 / Percentage) - 1 = Time period Triangular Moving Average A triangular moving average places more weight on the middle portion of the security’s price. To calculate a 12 period triangular moving average: 1 Take the number of the period of moving average + 1 (i.e. 12+1=13). 2 Divide the result in Step 1 by 2, (i.e. 13/2) and round to the nearest integer (i.e. 6.5 rounded up is 7). 3 Calculate a simple moving average (using the number from Step 2, i.e. 7 day moving average). DOWDECODED.COM 23
  • 29. 4 Calculate a simple moving average (using the number from Step 2) on the data from Step 3. Variable Moving Average A variable moving average is a form of exponential moving average that adjusts the smoothing percentage according to the Volatility. The more volatile the share's prices, the more weight is given to recent data. It is calculated as follows: Today's VMA value = ((EP * VR) * Close) + ((1 - (EP * VR)) * Yesterday's MA where…. EP is the Exponential Percentage = 2 / (time period + 1) VR is the Volatility Ratio = (9-day Chande Momentum Oscillator) / 100 This type of MA is seen by some to give more reliable signals in both long term and short term trending or trading markets as its calculation is adjusted according to the strength of trend. Weighted Moving Average A weighted moving average uses values calculated to give more weight to more recent dates. Each day in the moving average's time period is given a weighting, and this weighting is multiplied by that day's closing price to give a weighted value. Day (higher number = more recent) Weighting Closing Price WeightedValue 1 1 14 14 2 2 16 32 3 3 17 51 4 4 14 56 The total of the weighted values is then divided by the total weighting to give the average weighted value for each day. Using the figures above for a 4 day weighted moving average, the most recent value is calculated as follows: Total weighted value / Total weighting = (14 + 32 + 51 + 56) / (1 + 2 + 3 + 4) = 153 / 10 DOWDECODED.COM 24
  • 30. = 15.3 Channels Channels are an extension of moving averages that include maximum and minimum lines either side of a central moving average. Channels attempt to give a feel for a share’s fluctuations about the centre of the trend, and to locate when a trend will turn. Just how well a channel succeeds in this will be determined by how well it is matched to a given share. Simple envelopes simply shift the central moving average up and down by a certain percentage, while Bollinger bands also provide a measure of a share’s volatility. Envelopes (Trading Bands) An envelope is composed of two moving averages, which represent the boundaries of the security’s trading range. The envelope is displayed on top of the security with the upper moving average shifted up by a certain degree and the lower moving average shifted down by the same amount. The required shift is determined by the volatility of the security. Volatile securities will require a greater percentage shift, less volatile securities a smaller percentage shift. When the security reaches the upper band, this is taken as an indication to sell - when the security reaches the lower band, to buy. Bollinger Bands Bollinger Bands are bands displayed on top of the share price. The width between the bands varies depending on the volatility of the share price: • The greater the width the more volatile the share price • The narrower the width the less volatile the share price. Bollinger Bands are calculated as follows: Middle Band = Simple Moving Average of the closing price over n time periods Upper Band = Middle Band + X Lower Band = Middle Band - X where X = D * SQRT (SUM(Closing Price - Middle Band)² / n ) DOWDECODED.COM 25
  • 31. where….n is the number of time periods, D is the number of standard deviations, SUM is the sum over n days of the moving average, and SQRT is the square root. Trend lines The trend line is the straight line that best fits the data. The confidence lines, which run parallel to the trend, give an idea how definite the trend is - the closer together the lines are, the stronger the trend. DOWDECODED.COM 26
  • 32. Principle of Support and Resistance This idea is based on observation that the prices of shares often seem to ‘struggle’ about a line before finally ‘breaking free’. In its simplest application, a trend line is drawn from a trough to a peak. Alternatively a trend line may be drawn between successive peaks or troughs. As the share approaches the trend line it is often observed to suffer ‘resistance’ from the trend line. It will approach then fall away a number of times before finally breaking through. Often, upon breaking through the trend line, large price jumps are noted. Trend lines may also offer support. As a share’s price falls towards a trend line it may gain ‘support’. It will fall to around the level of the trend line a number of times before finally falling through. Again ‘breaking through’ the trend line will often result in large price changes. The skill of this technique lies in selecting appropriate trend lines that will correctly predict just where a share gains support and resistance. A number of techniques exist that try to locate good trend lines. Methods such as Fibonacci Arcs, Speed Resistance Lines or Gann Angles attempt to use number theory to locate these trend lines. In these techniques, a control line is drawn between successive troughs and peaks and a series of trend lines are drawn. It is then hoped that the trend lines will provide the share with support and resistance. Correlation Correlation is a measurement of the correlation of the price of a given share compared to an index share. The value lies between 1 and -1. 1 means that the price is totally in step with the index share. If a share has a high correlation, say over 0.6, it means it is more likely to be marked up (or down) just because the index share moves up (or down). To add this indicator, go to the Graph context menu, highlight the ‘Add indicator’ menu item, and select the indicator from the list which appears in a DOWDECODED.COM 27
  • 33. sub-menu. This will bring up a dialog box, in which you can select your settings. Equivolume Equivolume combines price and volume information, displaying these as a single box. The top and bottom levels of each box in the indicator chart show the price high and low for the period and the width of the box represents the volume for the period (if volume is very low, the box is so narrow it appears as a spike). As the width of each box varies with volume rather than with time, the horizontal scale of the indicator adjusts according to the traded volume. Overbought A share is considered to be overbought if it is over-performing relative to its ‘equilibrium’ level (i.e. the level that current trends suggest it should be). The same condition may also apply to the market as a whole. PE P/E is the ratio of the current price to the earnings per share (EPS). Sometimes referred to as the 'PER', the price-earnings ratio offers a measure of how highly (or not) the share is valued. It is calculated simply by dividing the latest price by the earnings per share figure. The earnings figure might be historic, projected or rolling. PEG is the P/E divided by the projected growth of a company. A high P/E implies an expectation of high growth in future years. A low PEG indicates that the shares are relatively cheap in view of the company’s expected growth. DOWDECODED.COM 28
  • 34. Sectors Markets are segmented into a number of sectors which relate to the main activity of the company. The constituents of the sectors are used to build up the sector indices. At the top level there are 8 sectors: 1 Resources 2 Gen Industrial 3 Consumer goods 4 Services 5 Utilities 6 Non-financials 7 Financials 8 Investment Trusts The FT uses the middle level which gives about 40 sectors. Stop-loss An instruction that a security should be sold if its price falls below a certain value. or……. a level set for a share at which you wish to sell to stop further losses. Trading A share is trading when it remains within a range (i.e. there is no distinct trend, the share’s price remaining around the same level). Volatility The volatility indicator measures the degree of movement, up or down, of a share price. The more rapid the movement, the greater the volatility. Higher volatility is generally believed to indicate higher risk. An ideal share has high growth with low volatility. To add this indicator, go to the Graph context menu, highlight the ‘Add indicator’ menu item, and select the indicator from the list which appears in a DOWDECODED.COM 29
  • 35. sub-menu. This will bring up a dialog box, in which you can select your settings. Volume A days' traded volume for a share is the number of shares that have changed hands that day. The chart shows the height of each bar representing a number of thousands or millions of shares traded on a particular day - the higher the bar reaches, the greater the number of shares that have changed hands. If a relatively large volume figure corresponds to a large change in price, this is commonly seen as significant. Dividend A dividend is the payment by a company to shareholders. Normally made twice a year. Yield Yield, unlike dividend, is quoted gross. So the Yield is the dividend, divided by the market price. Yield = ((Div / Price) x 100) Rights Issue When a company announces a rights issue, shares are offered to all shareholders at a certain date and almost always at a price below that of existing shares in the market. Very often, those shares which are not taken up by the shareholders are bought by institutions who have underwritten the rights issue. DOWDECODED.COM 30