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# Indicators tutorials

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• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Accumulation Distribution Line Accumulation Distribution Line Introduction Developed by Marc Chaikin, the Accumulation Distribution Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. Chaikin originally referred to the indicator as the Cumulative Money Flow Line. As with cumulative indicators, the Accumulation Distribution Line is a running total of each periods Money Flow Volume. First, a multiplier is calculated based on the relationship of the close to the high-low range. Second, the Money Flow Multiplier is multiplied by the periods volume to come up with a Money Flow Volume. A running total of the Money Flow Volume forms the Accumulation Distribution Line. Chartists can use this indicator to affirm a securitys underlying trend or anticipate reversals when the indicator diverges from the security price. Calculation There are three steps to calculating the Accumulation Distribution Line (ADL). First, calculate the Money Flow Multiplier. Second, multiply this value by volume to find the Money Flow Volume. Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL). 1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw . oe lw utpir (ls o) Hg ls) (ih o) 2 MnyFo Vlm =MnyFo Mlile xVlm frtePro . oe lw oue oe lw utpir oue o h eid 3 AL=Peiu AL+CretPro MnyFo Vlm . D rvos D urn eids oe lw oue The Money Flow Multiplier fluctuates between +1 and -1. As such, it holds the key to the Money Flow Volume and the Accumulation Distribution Line. The multiplier is positive when the close is in the upper half of the high-low range and negative when in the lower half. This makes perfect sense. Buying pressure is stronger than selling pressure when prices close in the upper half of the periods range (and visa versa). The Accumulation Distribution Line rises when the multiplier is positive and falls when the multiplier is negative.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 1/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com The multiplier adjusts the amount of volume that ends up in the Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1). The multiplier is +1 when the close is on the high and -1 when the close is on the low. All volume is positive when +1 and all volume is negative when -1. At .50, only half of the volume translates into the periods Money Flow Volume. The table below shows the Money Flow Multipliers, Money Flow Volume and Accumulation Distribution Line for Research-in-Motion (RIMM). Notice how the multiplier is between .50 and 1 when the close is strong and between -.50 and -1 when the close is weak.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 2/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Click here for a calculation of the Accumulation Distribution Line in an Excel Spreadsheet. Interpretation The Accumulation Distribution Line is a cumulative measure of each periods volume flow, or money flow. A high positive multiplier combined with high volume shows strong buying pressure that pushes the indicator higher. Conversely, a low negative number combined with high volume reflects strong selling pressure that pushes the indicator lower. Money Flow Volume accumulates to form a line that either confirms or contradicts the underlying price trend. In this regard, the indicator is used to either reinforce the underlying trend or cast doubts on its sustainability. An uptrend in prices with a downtrend in the Accumulation Distribution Line suggests underlying selling pressure (distribution) that could foreshadow a bearish reversal on the price chart. A downtrend in prices with an uptrend in the Accumulation Distribution Line indicate underlying buying pressure (accumulation) that could foreshadow a bullish reversal in prices. ADL versus OBV The Accumulation Distribution Line and On Balance Volume (OBV) are cumulative volume-based indicators that sometimes move in opposite directions because their basic formulas are different. Joe Granville developed On Balance Volume (OBV) as a cumulative measure of positive and negative volume flow. OBV adds a periods total volume when thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 3/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com close is up and subtracts it when the close is down. A cumulative total of this positive and negative volume flow forms the OBV line. This line can then be compared with the price chart of the underlying security to look for divergences or confirmation. As the formula above shows, Chaikin took a different approach by completely ignoring the change from one period to the next. Instead, the Accumulation Distribution Line focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Accumulation Distribution Line would rise if the close were above the midpoint of the high-low range. The chart above shows Clorox (CLX) with a big gap down and a close near the top of the days high-low range. OBV moved sharply lower because the close was below the prior close. The Accumulation Distribution Line moved higher because the close was near the high of the day. Trend Confirmation Trend confirmation is a pretty straight-forward concept. An uptrend in the Accumulation Distribution Line reinforces and uptrend on the price chart and visa versa. The chart below shows Freeport McMoran (FCX) and the Accumulation Distribution Line advancing in February-March, declining from April to June and then advancing from July to January. The Accumulation Distribution Line confirmed each of these price trends.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 4/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Divergences Bullish and bearish divergences are where is getting interesting. A bullish divergence forms when price moves to new lows, but the Accumulation Distribution Line does not confirm these lows and moves higher. A rising Accumulation Distribution Line shows, well, accumulation. Think of this as basically stealth buying pressure. Based on the theory that volume precedes price, chartists should be on alert for a bullish reversal on the price chart. The chart above shows Nordstrom (JWN) with the Accumulation Distribution Line. Notice how it is easy to compare price action when the indicator is placed "behind" the price plot. The indicator (pink) and the price trend moved in unison from February to June. Signs of accumulation emerged as the indicator bottomed in early July and started moving higher. JWN moved to a new low in late August. Even though the indicator showed signs of buying pressure, it was important to wait for a bullish catalyst or confirmation on the price chart. This catalyst came as the stock gapped up and surged on big volume.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 5/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com A bearish divergence forms when price moves to new highs, but the Accumulation Distribution Line does not confirm and moves lower. This shows distribution or underlying selling pressure that can foreshadow a bearish reversal on the price chart.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 6/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com The chart above shows Southwest Airlines (LUV) with the Accumulation Distribution Line peaking two months ahead of prices. The indicator not only peaked, but it also moved lower in March and April, which reflected some selling pressure. LUV confirmed weakness with a support break on the price chart and RSI moved below 40 shortly afterwards. RSI often trades in bull zones (40-80) and bear zones (20-60). RSI held in the bull zone until early May and then moved into a bear zone. Disconnect with Prices The Accumulation Distribution Line is an indicator based on a derivative of price and volume. This makes it at least two steps removed from the actual price of the underlying security. Moreover, the Money Flow Multiplier does not take into account prices changes from period to period. As such, it cannot be expected to always affirm price action or successfully predict price reversals with divergences. Sometimes there is a, gasp, disconnect between prices and the indicator. Sometimes the Accumulation Distribution Line simply doesnt work. This is why it vitally important to use the Accumulation Distribution Line, and all indicators for that matter, in conjunction with price/trend analysis or other indicators.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 7/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Conclusions The Accumulation Distribution Line can be used to gauge the general flow of volume. An uptrend indicates that buying pressure is prevailing on a regular basis, while a downtrend indicates that selling pressure is prevailing. Bullish and bearish divergences serve as alerts for a potential reversal on the price chart. As with all indicators, it is important to use the Accumulation Distribution Line in conjunction with other aspects of technical analysis, such as momentum oscillators and chart patterns. It is not a stand-alone indicator. SharpCharts The Accumulation Distribution Line is available in SharpCharts as an indicator. After selecting, the indicator can be positioned above, below or behind the price of the underlying security. Positioning "behind price" makes it easy to compare OBV with the underlying security. Chartist can also add a moving average or another indicator to OBV by selecting "advanced options", which is to the right of the indicator position. Click here for a live chart with the Accumulation Distribution Line.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 8/10
• 6/1/12 Accumulation Distribution Line - ChartSchool - StockCharts.com Suggested Scans Bullish Divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bullish divergences are found by looking for stocks where price is BELOW the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are ABOVE the 65-day SMA and 20-day SMA. Bearish divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bearish divergences are found by looking for stocks where price is ABOVE the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are BELOW the 65-day SMA and 20-day SMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:accumulation_distrib 9/10
• 6/1/12 Aroon - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Aroon Aroon Introduction Developed by Tushar Chande in 1995, Aroon is an indicator system that determines whether a stock is trending or not and how strong the trend is. "Aroon" means "Dawns Early Light" in Sanskrit. Chande chose this name because the indicators are designed to reveal the beginning of a new trend. The Aroon indicators measure the number of periods since price recorded an x-day high or low. There are two separate indicators: Aroon-Up and Aroon-Down. A 25-day Aroon-Up measures the number of days since a 25-day high. A 25-day Aroon-Down measures the number of days since a 25-day low. In this sense, the Aroon indicators are quite different from typical momentum oscillators, which focus on price relative to time. Aroon is unique because it focuses on time relative to price. Chartists can use the Aroon indicators to spot emerging trends, identify consolidations, define correction periods and anticipate reversals. Calculation The Aroon indicators are shown in percentage terms and fluctuate between 0 and 100. Aroon-Up is based on price highs, while Aroon-Down is based on price lows. These two indicators are plotted side-by-side for easy comparison. The default parameter setting in Sharpcharts is 25 and the example below is based on a 25 days. AonU =(2 -Dy Sne2-a Hg)2)x10 ro-p (5 as ic 5dy ih/5 0 AonDw =(2 -Dy Sne2-a Lw/5 x10 ro-on (5 as ic 5dy o)2) 0stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 1/7
• 6/1/12 Aroon - ChartSchool - StockCharts.com Aroon declines as the elapsed time between a new high or low increases. 50 is the cut off point. Because 12.5 days marks the exact middle, a reading of exactly 50 is impossible on a daily chart. It is possible with other timeframes. On daily charts, Aroon is either below 50 (48) or above 50 (52). A reading above 50 means a new high or low was recorded within the last 12 days or less. This is the most recent half of the look-back period. A reading below 50 means a new high or low was recorded within the last 13 days or more {(25-13)/25 x 100 = 48). This is the latter half of the look-back period. The table below shows the range of values for 25-day Aroon-Up and 25-day Aroon-Downstockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 2/7
• 6/1/12 Aroon - ChartSchool - StockCharts.com Interpretation The Aroon indicators fluctuate above/below a centerline (50) and are bound between 0 and 100. These three levels are important to interpretation. At its most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down is below 50. This indicates a greater propensity for new x-day highs than lows. The converse is true for a downtrend. The bears have the edge when Aroon-Up is below 50 and Aroon-Down is above 50. A surge to 100 indicates that a trend may be emerging. This can be confirmed with a decline in the other Aroon indicator. For example, a move to 100 in Aroon-Up combined with a decline below 30 in Aroon-Down shows upside strength. Consistently high readings mean prices are regularly hitting new highs or new lows for the specified period. Prices are moving consistently higher when Aroon-Up remains in the 70-100 range for an extended period. Conversely, consistently low readings indicate that prices are seldom hitting new highs or lows. Prices are NOT moving lower when Aroon-Down remains in the 0-30 range for an extended period. This does not mean prices are moving higher though. For that we need to check Aroon-Up. New Trend Emerging There are three stages to an emerging trend signal. First, the Aroon lines will cross. Second, the Aroon lines will cross above/below 50. Third, one of the Aroon lines will reach 100. For example, the first stage of an uptrend signal is when Aroon-Up moves above Aroon-Down. This shows new highs becoming more recent than new lows. Keep in mind that Aroon measures the time elapsed, not the price. The second stage is when Aroon-Up moves above 50 and Aroon-Down moves below 50. The third stage is when Aroon-Up reaches 100 and Aroon-Down remains at relatively low levels. The first and second stages do not always occur in that order. Sometimes Aroon-Up will break above 50 and then above Aroon- Down. Reverse engineering the uptrend stages will give you the emerging downtrend signal. Aroon-Down breaks above Aroon-Up, breaks above 50 and reaches 100.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 3/7
• 6/1/12 Aroon - ChartSchool - StockCharts.com The chart above shows CSX Corp (CSX) with weekly bars and 25-week Aroon. First, notice that the downtrend began weakening as Aroon-Down declined below 50 at the end of 2007 (far left). The first stage of an uptrend was signaled when Aroon-Up moved above Aroon-Down in early 2008 (first orange circle). Aroon-Up continued above 50 and hit 100 as Aroon- Down remained at relatively low levels. Notice how Aroon-Up remained near 100 as the advance continued. This emerging uptrend signal lasted until September 2008 when Aroon-Down broke above Aroon-Up, exceeded 50 and surged to 100 (second orange circle). Notice how Aroon-Down remained near 100 as the downtrend extended. The third trend on this chart was signaled when Aroon-Up surged to 100 in June 2009 and remained above 50 for over a year (third orange circle). Also notice that Aroon-Down remained below 50 for over a year. Consolidation Period The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low has not been recorded in 13 or more days. Prices are clearly flat when not recording new highs or new lows. Similarly, a consolidation is usually forming when both Aroon-Up and Aroon-Down move lower in parallel fashion and the distance between the two lines is quite small. This narrow parallel decline indicates that some sort of trading range is forming. The first Aroon indicator to break above 50 and hit 100 will trigger the next signal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 4/7
• 6/1/12 Aroon - ChartSchool - StockCharts.com The chart below shows Omnicom (OMC) with the Aroon indicators moving below 50 in a parallel decline. The width of the channel could be narrower, but we can see the consolidation taking shape on the price chart for confirmation. Both Aroon- Up and Aroon-Down were below 50 in the yellow area. Aroon-Up then broke out and surged to 100, which was before the breakout. Further confirmation came with another Aroon-Up surge at the breakout point. This surge/breakout signaled an end of the consolidation and the beginning of the advance.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 5/7
• 6/1/12 Aroon - ChartSchool - StockCharts.com The next chart shows Lifepoint Hospitals (LPNT) with 25-day Aroon. Both lines moved lower in May with a parallel decline. The distance between the lines was around 25 points throughout the decline. Aroon-Up and Aroon-Down flattened in June and both remained below 50 for around two weeks as the triangle consolidation extended. Aroon-Down (red) was the first to make its move with a break above 50 just before the triangle break on the price chart. Aroon-Down hit 100 as prices broke triangle support to signal a continuation lower. Conclusions Aroon-Up and Aroon-Down are complementary indicators that measure the elapsed time between new x-day highs and lows, respectively. They are shown together so chartists can easily identify the stronger of the two and determine the trend bias. A surge in Aroon-Up combined with a decline in Aroon-Down signals the emergence of an uptrend. Conversely, a surge in Aroon-Down combined with a decline in Aroon-Up signals the start of a downtrend. A consolidation is present when both move lower in parallel fashion or when both remain at low levels (below 30). Chartist can use the Aroon indicators to determine if a security is trending or trading flat and then use other indicators to generate appropriate signals. For example, chartists might use a momentum oscillator to identify oversold levels when 25-week Aroon indicates that the long-term trend is up. SharpCharts The Aroon indicators are available on SharpCharts as an indicator. Simply choosing "Aroon" will display Aroon-Up and Aroon-Down. These indicators can be positioned above, below or behind the price plot of the underlying security. Users can click on the green arrow to the right of the indicator to see advanced options and add a horizontal line at 50. Users can even apply another indicator to the Aroon indicators. Click here for live chart with the Aroon indicators. Suggested Scans Aroon-Up and Aroon-Down are below 20: This simple scan searches for stocks where Aroon-Up and Aroon-Down are both below 20. A consolidation is often present when both indicators are at such low levels. The first to break above 50 triggers next directional clue. Send us your Feedback! Advertisement:stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aroon 6/7
• 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com Directional movement is positive (plus) when the current high minus the prior high is greater than the prior low minus the current low. This so-called Plus Directional Movement (+DM) then equals the current high minus the prior high, provided it is positive. A negative value would simply be entered as zero. Directional movement is negative (minus) when the prior low minus the current low is greater than the current high minus the prior high. This so-called Minus Directional Movement (-DM) equals the prior low minus the current low, provided it is positive. A negative value would simply be entered as zero. The chart above shows four calculation examples for directional movement. The first pairing shows a big positive difference between the highs for a strong Plus Directional Movement (+DM). The second pairing shows an outside day with Minus Directional Movement (-DM) getting the edge. The third pairing shows a big difference between the lows for a strong Minus Directional Movement (-DM). The final pairing shows an inside day, which amounts to no directional movement (zero). Both Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are negative and cancel out each other. Negative values revert to zero. All inside days will have zero directional movement. Calculation The calculation steps for the Average Directional Index (ADX) are detailed in each step. Average True Range (ATR) is not detailed because there is an entire ChartSchool article for this. Basically, ATR is Wilders version of the two period trading range. Smoothed versions of Plus Directional Movement (+DM) and Minus Directional Movement (-DM) are divided by a smoothed version Average True Range (ATR) to reflect the true magnitude of a move. The example below is based on a 14- day ADX calculation. 1. Calculate the True Range (TR), Plus Directional Movement (+DM) and Minus Directional Movement (-DM) for each period.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 2/9
• 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com Wilders Smoothing As seen in the ADX calculation, there is a lot of smoothing involved and it is important to understand the effects. Because of Wilders smoothing techniques, it can take around 150 periods of data to get true ADX values. Wilder uses similar smoothing techniques with his RSI and Average True Range calculations. ADX values using only 30 periods of historical data will not match ADX values using 150 periods of historical data. ADX values with 150 days or more of data will remain consistent. The first technique is used to smooth each periods +DM1, -DM1 and TR1 values over 14 periods. As with an exponential moving average, the calculation has to start somewhere so the first value is simply the sum of the first 14 periods. As shown below, smoothing starts with the second 14-period calculation and continues throughout. FrtT1 =Smo frt1 proso T1 is R4 u f is 4 eid f R Scn T1 =FrtT1 -(is T1/4 +CretT1 eod R4 is R4 Frt R41) urn R Sbeun Vle =PirT1 -(ro T1/4 +CretT1 usqet aus ro R4 Pir R41) urn R4 The second technique is used to smooth each periods DX value to finish with the Average Directional Index (ADX). First, calculate an average for the first 14 days as a starting point. The second and subsequent calculations use the smoothing technique below: FrtAX4=1 pro Aeaeo D is D1 4 eid vrg f X Scn AX4=(is AX4x1)+CretD Vle eod D1 Frt D1 3 urn X au Sbeun AX4=(ro AX4x1)+CretD Vle usqet D1 Pir D1 3 urn X austockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 4/9
• 6/1/12 Average Directional Index (ADX) - ChartSchool - StockCharts.com used when trading above the 50-day moving average. Once initiated, the Parabolic SAR can be used to set stops. Click here for a live example of ADX. Suggested Scans Overall Uptrend with +DI Crossing above -DI: This scan starts with stocks that average 100,000 shares daily volume and have an average closing price above 10. An uptrend is present when trading above the 50-day SMA. A buy signal is possible when ADX is above 20. This signal materializes when +DI moves above - DI. Overall Downtrend with - DI Crossing above +DI: This scan starts with stocks that average 100,000 shares daily volumestockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_ 8/9
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Average True Range (ATR) Average True Range (ATR) Introduction Developed by J. Welles Wilder, the Average True Range (ATR) is an indicator that measures volatility. As with most of his indicators, Wilder designed ATR with commodities and daily prices in mind. Commodities are frequently more volatile than stocks. They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this "missing" volatility. It is important to remember that ATR does not provide an indication of price direction, just volatility. Wilder features ATR in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilders indicators have stood the test of time and remain extremely popular. True Range Wilder started with a concept called True Range (TR), which is defined as the greatest of the following: Method 1: Current High less the current Low Method 2: Current High less the previous Close (absolute value) Method 3: Current Low less the previous Close (absolute value) Absolute values are used to insure positive numbers. After all, Wilder was interested in measuring the distance between two points, not the direction. If the current periods high is above the prior periods high and the low is below the prior periods low, then the current periods high-low range will be used as the True Range. This is an outside day that would use Method 1 to calculate the TR. This is pretty straight forward. Methods 2 and 3 are used when there is a gap or an inside day. A gap occurs when the previous close is greater than the current high (signaling a potential gap down or limit move) or the previous close is lower than the current low (signaling a potential gap up or limit move). The image below shows examples when methods 2 and 3 are appropriate.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 1/7
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com Example A: A small high/low range formed after a gap up. The TR equals the absolute value of the difference between the current high and the previous close. Example B: A small high/low range formed after a gap down. The TR equals the absolute value of the difference between the current low and the previous close. Example C: Even though the current close is within the previous high/low range, the current high/low range is quite small. In fact, it is smaller than the absolute value of the difference between the current high and the previous close, which is used to value the TR. Calculation Typically, the Average True Range (ATR) is based on 14 periods and can be calculated on an intraday, daily, weekly or monthly basis. For this example, the ATR will be based on daily data. Because there must be a beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the average of the daily TR values for the last 14 days. After that, Wilder sought to smooth the data by incorporating the previous periods ATR value. CretAR=[PirARx1)+CretT]/1 urn T (ro T 3 urn R 4 -Mlil tepeiu 1-a ARb 1. utpy h rvos 4dy T y 3 -Adtems rcn dysT vle d h ot eet a R au. -Dvd tettlb 1 iie h oa y 4stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 2/7
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com Click here for an Excel Spreadsheet showing the start of an ATR calculation for QQQQ. In the Spreadsheet example, the first True Range value (.91) equals the High minus the Low (yellow cells). The first 14-day ATR value (.56)) was calculated by finding the average of the first 14 True Range values (blue cell). Subsequent ATR values were smoothed using the formula above. The spreadsheet values correspond with the yellow area on the chart below. Notice how ATR surged as QQQQ plunged in May with many long candlesticks.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 3/7
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com For those trying this at home, a few caveats apply. First, ATR values depend on where you begin. The first True Range value is simply the current High minus the current Low and the first ATR is an average of the first 14 True Range values. The real ATR formula does not kick in until day 15. Even so, the remnants of these first two calculations linger to slightly affect ATR values. Spreadsheet values for a small subset of data may not match exactly with what is seen on the price chart. Decimal rounding can also slightly affect ATR values. Absolute ATR ATR is based on the True Range, which uses absolute price changes. As such, ATR reflects volatility as absolute level. In other words, ATR is not shown as a percentage of the current close. This means low priced stocks will have lower ATR values than high price stocks. For example, a \$20-30 security will have much lower ATR values than a \$200-300 security. Because of this, ATR values are not comparable. Even large price movements for a single security, such as a decline from 70 to 20, can make long-term ATR comparisons impractical. Chart 4 shows Google with double digit ATR values and chart 5 shows Microsoft with ATR values below 1. Despite different values, their ATR lines have similar shapes.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 4/7
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com Conclusions ATR is not a directional indicator, such as MACD or RSI. Instead, ATR is a unique volatility indicator that reflects the degree of interest or disinterest in a move. Strong moves, in either direction, are often accompanied by large ranges, orstockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 5/7
• 6/1/12 Average True Range (ATR) - ChartSchool - StockCharts.com MetaTrader4 - ACFX Low Spreads Starting from 2 Pips. Start Earning your Money Now! www.acfx.com 95-99% Accurate Tips Earn Rs 200000 / Month in Equity & Commodity with 99% Accurate Tips www.pyramidstocks.com Free Trial Intraday Tips Pay Only When You Make Profits 90% Accuracy. Try It Yourself! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_true_range_a 7/7
• 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com After identifying a bigger up trend, %B can be considered oversold when it moves to zero or below. Remember, %B moves to zero when price hits the lower band and below zero when price moves below the lower band. This represents a move that is 2 standard deviations below the 20-day moving average. Chart 2 shows the Nasdaq 100 ETF (QQQQ) within an uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early July and early November provided good entry points to partake in the bigger uptrend (green arrows).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 2/5
• 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com Signals: Trend Identification John Bollingers book also featured a trend-following system using %B with the Money Force Index, also known as the Money Flow Index (MFI). An uptrend begins when %B is above .80 and MFI is above 80. MFI is bound between zero and one hundred. A move above 80 places MFI in the upper 20% of its range, which is a strong reading. Bollinger suggested setting MFI periods at 1/2 the number of Bollinger Band periods, which would be 10. Downtrends are identified when %B is below .20 and MFI is below 20. Chart 3 shows FedEx (FDX) with Bollinger Bands (20,2), %B and MFI (10). An uptrend started in late July when %B was above .80 and MFI was above 80. This uptrend was subsequently affirmed with two more signals in early September and mid November. While these signals were good for trend identification, traders would likely have had issues with the risk- reward ratio after such big moves. It takes a substantial price surge to push %B above .80 and MFI above 80 at the same time. Traders might consider using this method to identify the trend and then look for appropriate overbought or oversold levels for better entry points. Conclusions %B quantifies the relationship between price and Bollinger Bands. Readings above .80 indicate that price is near the upper band. Readings below .20 indicate that price is near the lower band. Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its own, it is best when used in conjunction with other indicators or price analysis. Click here for a live chart with Bollinger Bands.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 3/5
• 6/1/12 Bollinger Band %B - ChartSchool - StockCharts.com %B and SharpCharts %B can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the number of standard deviations for the upper and lower band. %B can be positioned above, below or behind the price plot. Click here to see a live example of %B. Suggested Scans %B Uptrend Scan: This scan filters out stocks where %B is above .80 and MFI just crossed above 80. According to Bollinger, these stocks could be starting new up swings. This scan is just a starting point. Further refinement and analysis are required. %B Downtrend Scan: This scan filters out stocks where %B is below .20 and MFI just crossed below 20. According to Bollinger, these stocks could be starting new down swings. This scan is just a starting point. Further refinement and analysis are required. Further Study Bollinger on Bollinger Bands John Bollinger Advertisement: Online Forex Try the ACFX Free \$50.000 Demo. Open an Account Now! www.acfx.com Free Techincal Analysis Get support & resistance levels for 15 yrs & 2574 instruments for free. www.dynamiclevels.com Best Intraday Tips Pay Only When You Make Profits 90% Accuracy. Get Free Trial Now! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutesstockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_perce 4/5
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Bollinger BandWidth Bollinger BandWidth Introduction Bollinger BandWidth is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to Bollinger BandWidth as one of two indicators that can be derived from Bollinger Bands. The other indicator is %B. Non-normalized BandWidth measures the distance, or difference, between the upper band and the lower band. BandWidth decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling BandWidth reflects decreasing volatility and rising BandWidth reflects increasing volatility. SharpCharts Calculation (pe Bn -LwrBn) Upr ad oe ad Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average usually set at 20 periods. The outer bands are usually set 2 standard deviations above and below the middle band. Settings can be adjusted to suit the characteristics of particular securities or trading styles. BandWidth is simply the difference between the upper band and the lower band.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 1/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com The chart above shows the S&P 500 ETF (SPY) with Bollinger Bands, BandWidth and the Standard Deviation. Notice how BandWidth tracks the Standard Deviation (volatility). The image below shows a spreadsheet with the calculations for June 2009.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 2/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Defining Narrowness It is important to remember that non-normalized BandWidth varies according to securitys volatility and price. A BandWidth value of 5 would be considered narrow for \$100 a stock, but wide for a \$30 stock. Five is 5% of 100, but 16.6% of 30. Usually, Bandwith is considered low (narrow) when it is 5-10% of a securitys price. Low BandWidth for a \$50 stock would range from 2.5 to 5, while low BandWidth for a \$20 stock would range from .50 to 1. Depending on underlying volatility, the definition of narrowness varies from stock to stock. Narrow BandWidth can also be gauged relative to prior BandWidth values over a period of time. It is important to get a good look-back period to define BandWidth range. For example, a one year chart will show BandWidth highs and lows over a significant timeframe. BandWidth is considered narrow as it approaches it the lows of its one year range and high as it approaches the highs of its range. Signal: The Squeeze Bollinger BandWidth is best for identifying The Squeeze. This occurs when volatility falls to a very low level, as evidenced by the narrowing bands. The upper and lower bands are based on the standard deviation, which is a measure of volatility. Therefore, volatility contracts as the bands narrow. The bands narrow as price flattens or moves within a relatively narrow range. The theory is that periods of low volatility are followed by periods of high volatility. Relatively narrow BandWidth (a.k.a. the Squeeze) can foreshadow a significant advance or decline. After a Squeeze, a price surge and subsequent band break signal the start of a new move. A new advance starts with a Squeeze and subsequent break above the upper band. A new decline starts with a Squeeze and subsequent break below the lower band. Chart 2 shows Alaska Airlines (ALK) with a squeeze in mid June. After declining in April-May, ALK stabilized in early June as Bollinger Bands narrowed. BandWidth dipped to around 1.5 to put the Squeeze play on in mid June. With the stock around 15-16, BandWidth was less than 10% of the stock price. With the subsequent surge above the upper band, the stock broke out to trigger an extended advance.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 3/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Chart 3 shows Aeropostale (ARO) with a couple of Squeezes. The second Squeeze occurred in October as ARO consolidated around 43 and BandWidth dipped below 3. Aeropostale is priced higher than Alaska Airlines and this means its non-normalized BandWidth will be relatively higher. Low Bandwith for ARO is below 4. Relatively low BandWidth in ARO alerted traders to be ready for a move in mid August. ARO subsequently broke the lower band with a move below 40 and this triggered an extended decline. The advance stalled in late September and BandWidth narrowed in October. Notice how BandWidth declined back to its August lows in early October and then flattened out. The subsequent break below the lower Bollinger Band triggered a bearish signal in late October.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 4/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com The Squeeze can also be applied to weekly charts or longer timeframes. Volatility and BandWidth on weekly charts is higher than on the daily chart. This makes sense because larger price movements can be expected over longer timeframes. Chart 4 shows Barrick Gold (ABX) consolidating throughout 2006 and into 2007. As the consolidation narrowed and a triangle formed, Bollinger Bands contracted and BandWidth dipped below 5. Notice how BandWidth remained at low levels as the consolidation extended. A bullish signal triggered with the breakout in July 2007. BandWidth also rose as prices moved sharply in one direction and Bollinger Bands widened.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 5/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Chart 5 shows Honeywell (HON) with an extended trading range around 55. There was a move to the upper band in May, but no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal. Conclusions The BandWidth indicator can be used to identify the Bollinger Band Squeeze. This alerts chartists to prepare for a move, but direction depends on the subsequent band break. A Squeeze and break above the upper band is bullish, while a Squeeze and break below the lower band is bearish. Be careful for head-fakes though. Sometimes the first break fails to hold as prices reverse the other way. Strong breaks hold and seldom look back. An upside breakout followed by an immediately pullback should serve as a warning. BandWidth and SharpCharts Bollinger BandWidth can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the number of standard deviations for the upper and lower band. BandWidth can be positioned above, below or behind the price plot. Click here to see a live example of BandWidth. BandWidth and Market Carpets Normalized Bollinger BandWidth is shown in the Market Carpet. This allows users to compare BandWidth for a number of securities. Bollinger BandWidth is normalized by divided the width by the middle band. Using the Sector Market Carpet as an example, choose Bollinger BandWidth and then click the delta icon (little triangle) to view absolute levels. A shaded deltastockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 6/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com icon shows percentage change. A white delta icon shows absolute levels. Green boxes show stocks with relatively wide BandWidth. Light boxes show stocks with relatively narrow BandWidth. A list of the stocks with the narrowest BandWidth is shown at the bottom right of the Market Carpet (Bottom 5). Click the names to see a small chart above. Users can dive into the sectors by clicking on the sector heading (e.g. Technology). With nine sectors and the Bottom 5 stocks listed for each sector, users can quickly view 45 stocks with relatively narrow BandWidth. Further Study Bollinger on Bollinger Bands John Bollinger —-stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 7/8
• 6/1/12 Bollinger BandWidth - ChartSchool - StockCharts.com Send us your Feedback! Advertisement: Online Forex Try the ACFX Free \$50.000 Demo. Open an Account Now! www.acfx.com 2 days Free Trial in Gold Free Trading Tips on Gold Commodity Join for 2 Days Free Trial. www.capitalvia.com Best Intraday Tips Pay Only When You Make Profits 90% Accuracy. Get Free Trial Now! BestStockIdeas.co.in/BSE-NSE Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_band_width 8/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Commodity Channel Index (CCI) Commodity Channel Index (CCI) Introduction Developed by Donald Lambert and featured in Commodities magazine in 1980, the Commodity Channel Index (CCI) is a versatile indicator that can be used to identify a new trend or warn of extreme conditions. Lambert originally developed CCI to identify cyclical turns in commodities, but the indicator can successfully applied to indices, ETFs, stocks and other securities. In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average. In this manner, CCI can be used to identify overbought and oversold levels. Calculation The example below is based on a 20-period Commodity Channel Index (CCI) calculation. The number of CCI periods is also used for the calculations of the simple moving average and Mean Deviation. CI=(yia Pie - 2-eidSAo T)/(05xMa Dvain C Tpcl rc 0pro M f P .1 en eito) TpclPie(P =(ih+Lw+Coe/ yia rc T) Hg o ls)3 Cntn =.1 osat 05 Teeaefu sest cluaigteMa Dvain Frt sbrc hr r or tp o acltn h en eito. is, utat tems rcn 2-eidaeaeo tetpclpiefo ec pro h ot eet 0pro vrg f h yia rc rm ah eids tpclpie Scn,tk teaslt vle o teenmes Tid yia rc. eod ae h boue aus f hs ubr. hr, smteaslt vle.Fut,dvd b tettlnme o pros(0. u h boue aus orh iie y h oa ubr f eid 2) Lambert set the constant at .015 to ensure that approximately 70 to 80 percent of CCI values would fall between -100 and +100. This percentage also depends on the look-back period. A shorter CCI (10 periods) will be more volatile with a smaller percentage of values between +100 and -100. Conversely, a longer CCI (40 periods) will have a higher percentage of values between +100 and -100.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 1/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com Click here for a CCI calculation in an Excel Spreadsheet.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 2/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com Interpretation CCI measures the difference between a securitys price change and its average price change. High positive readings indicate that prices are well above their average, which is a show of strength. Low negative readings indicate that prices are well below their average, which is a show of weakness. The Commodity Channel Index (CCI) can be used as either a coincident or leading indicator. As a coincident indicator, surges above +100 reflect strong price action that can signal the start of an uptrend. Plunges below -100 reflect weak price action that can signal the start of a downtrend. As a leading indicator, chartists can look for overbought or oversold conditions that may foreshadow a mean reversion. Similarly, bullish and bearish divergences can be use to detect early momentum shifts and anticipate trend reversals. New Trend Emerging As noted above, the majority of CCI movement occurs between -100 and +100. A move that exceeds this range shows unusual strength or weakness that can foreshadow an extended move. Think of these levels as bullish or bearish filters. Technically, CCI favors the bulls when positive and the bears when negative. However, using a simple zero line crossovers can result in many whipsaws. Although entry points will lag more, requiring a move above +100 for a bullish signal and a move below -100 for a bearish signal reduces whipsaws. The chart below shows Caterpillar (CAT) with 20-day CCI. There were four trend signals within a seven month period. Obviously, a 20-day CCI is not suited for long-term signals. Chartists need to use weekly or monthly charts for long-term signals. The stock peaked on 11-Jan and turned down. CCI moved below -100 on 22-January (8 days later) to signal the start of an extended move. Similarly, the stock bottomed on 8-February and CCI moved above +100 on 17-February (6stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 3/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com days later) to signal the start of an extended advance. CCI does not catch the exact top or bottom, but it can help filter out insignificant moves and focus on the larger trend. CCI triggered a bullish signal when CAT surged above 60 in June. Some traders may have considered the stock overbought and the reward-to-risk ratio unfavorable at these levels. With the bullish signal in force, focus would have been on bullish setups with a good reward-to-risk ratio. Notice that the stock retraced around 62% of the prior advance and formed a falling flag by the end of June. The subsequent surge above the flag trendline provided another bullish signal with CCI still in bull mode. Overbought/Oversold Identifying overbought and oversold levels can be tricky with the Commodity Channel Index (CCI), or any other momentum oscillator for that matter. First, CCI is an unbound oscillator. Theoretically, there are no upside or downside limits. This makes an overbought or oversold assessment subjective. Second, securities can continue moving higher after an indicator becomes overbought. Likewise, securities can continue moving lower after an indicator becomes oversold. The definition of overbought or oversold varies for the Commodity Channel Index (CCI). ±100 may work in a trading range, but more extreme levels are needed for other situations. ±200 is a much harder level to reach and more representative of a true extreme. Selection of overbought/oversold levels also depends on the volatility of the underlying security. The CCI range for an index ETF, such as SPY, will be usually be smaller than for a most stocks, such as Google.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 4/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com The chart above shows Google (GOOG) with CCI(20). Horizontal lines at ±200 were added using the advanced indicators options. From early February to early October (2010), Google exceeded ±200 at least five times. The red dotted lines show when CCI moved back below +200 and the green dotted lines show when CCI moved back above -200. It is important to wait for these crosses to reduce whipsaws should the trend extend. Such a system is not fool proof though. Notice how Google kept on moving higher even after CCI became overbought in mid September and moved below -200. Bullish Bearish Divergences Divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and CCI forms a higher low, which shows less downside momentum. A bearish divergence forms when the security records a higher high and CCI forms a lower high, which shows less upside momentum. Before getting too excited about divergences as great reversal indicators, note that divergences can be misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences often after appear in extended downtrends. Confirmation holds the key to divergences. While divergences reflect a change in momentum that can foreshadow a trend reversal, chartists should set a confirmation point for CCI or the price chart. A bearish divergence can be confirmed with a break below zero in CCI or a support break on the price chart. Conversely, a bullish divergence can be confirmed with a break above zero in CCI or a resistance break on the price chart.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 5/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com The chart above shows United Parcel Service (UPS) with 40-day CCI. A longer timeframe, 40 versus 20, was used to reduce volatility. There are three sizable divergences over a seven month period, which is actually quite a few for just seven months. First, UPS raced to new highs in early May, but CCI failed to exceed its March high and formed a bearish divergence. A support break on the price chart and CCI move into negative territory to0 confirm this divergence a few days later. Second, a bullish divergence formed in early July as the stock moved to a lower low, but CCI formed a higher low. This divergence was confirmed with a CCI break into positive territory. Also notice that UPS filled the late June gap with a surge in early July. Third, a bearish divergence formed in early September and this was confirmed when CCI dipped into negative territory. Despite a CCI confirmation, price never broke support and the divergence did not result in a trend reversal. Not all divergences produce good signals. Conclusions CCI is a versatile momentum oscillator that can be used to identify overbought/oversold levels or trend reversals. The indicator becomes overbought or oversold when it reaches a relative extreme. That extreme depends on the characteristics of the underlying security and the historical range for CCI. Volatile securities are likely to require greater extremes than docile securities. Trend changes can be identified when CCI crosses a specific threshold between zero and 100. Regardless of how CCI is used, chartists should use CCI in conjunction with other indicators or price analysis. Another momentum oscillator would be redundant, but On Balance Volume (OBV) or the Accumulation Distribution Line can add value to CCI signals. Using with SharpCharts CCI is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing CCI directly behind the price makes it easy to compare indicator movements with price movements. Thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 6/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com default setting is 20-periods, but this can be adjusted to suit analysis needs. A shorter timeframe makes the indicator more sensitive. A longer timeframe makes it less sensitive. Members can click the green arrow next to "advanced options" to add horizontal lines to mark overbought or oversold levels. Two lines can be added by separating the numbers with a comma (200,-200). Suggested Scans CCI Oversold in Uptrend: This scan reveals stocks that are in an uptrend with oversold CCI turning up. First, stocks must be above their 200-day moving average to be in an overall uptrend. Second, CCI must cross below -200 to show the indicator rising from oversold levels. CCI Overbought in Downtrend: This scan reveals stocks that are in a downtrend with overbought CCI turning down. First,stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 7/8
• 6/1/12 Commodity Channel Index (CCI) - ChartSchool - StockCharts.com stocks must be below their 200-day moving average to be in an overall downtrend. Second, CCI must cross above +200 to show the indicator falling from overbought levels. Further Study Murphy has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to the Commodity Channel Index. Pring shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pring Send us your Feedback! Advertisement: 2 days Free Trial in Gold Free Trading Tips on Gold Commodity Join for 2 Days Free Trial. www.capitalvia.com Free Techincal Analysis Get support & resistance levels for 15 yrs & 2574 instruments for free. www.dynamiclevels.com Best Nifty Options Tips. 90% Accuracy and Single Target. Apply for a Free Trail Now. www.niftyprime.com Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_in 8/8
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Chaikin Money Flow Chaikin Money Flow Introduction Developed by Marc Chaikin, Chaikin Money Flow measures the amount of Money Flow Volume over a specific period. Money Flow Volume forms the basis for the Accumulation Distribution Line. Instead of a cumulative total of Money Flow Volume, Chaikin Money Flow simply sums Money Flow Volume for a specific look-back period, typically 20 or 21 days. The resulting indicator fluctuates above/below the zero line just like an oscillator. Chartists weigh the balance of buying or selling pressure with the absolute level of Chaikin Money Flow. Chartists can also look for crosses above or below the zero line to identify changes on money flow. Calculation There are four steps to calculating Chaikin Money Flow (CMF). The example below is based on 20-periods. First, calculate the Money Flow Multiplier for each period. Second, multiply this value by the periods volume to find Money Flow Volume. Third, sum Money Flow Volume for the 20 periods and divide by the 20 period sum of volume. 1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw . oe lw utpir (ls o) Hg ls) (ih o) 2 MnyFo Vlm =MnyFo Mlile xVlm frtePro . oe lw oue oe lw utpir oue o h eid 3 2-eidCF=2-eidSmo MnyFo Vlm /2 pro Smo Vlm . 0pro M 0pro u f oe lw oue 0 eid u f oue Each periods Money Flow Volume depends on the Money Flow Multiplier. This multiplier is positive when the close is in the upper a half of the periods high-low range and negative when the close is in the lower half. The multiplier equals 1 when the close equals the high and -1 when the close equals the low. In this way the multiplier adjusts the amount of volume that ends up in Money Flow Volume. Volume is in effect reduced unless the Money Flow Multiplier is at its extremes (+1 or -1).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 1/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The table above shows some examples using daily data for Research in Motion (RIMM). Notice how the multiplier was near +1 on 5-Jan when the stock closed near its high. The multiplier dipped to -.97 on 18-Jan when the stock closed near its low. The multiplier finished near zero (-.07) when the stock closed near the mid point of its high-low range on 29-Dec. Click here for a calculation example of Chaikin Money Flow in an Excel Spreadsheet. Interpretation Chaikin Money Flow (CMF) is an oscillator that fluctuates between -1 and +1. Rarely, if ever, will the indicator reach these extremes. It would take 20 consecutive closes on the high (low) for 20-day Chaikin Money Flow to reach +1 (-1). Typically, this oscillator fluctuates between -.50 and +.50 with zero as the centerline.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 2/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Chaikin Money Flow measures buying and selling pressure for a given period of time. A move into positive territory indicates buying pressure, while a move into negative territory indicates selling pressure. Chartists can use the absolute value of Chaikin Money Flow to confirm or question the price action of the underlying. Positive CMF would confirm an uptrend, but negative CMF would call into question the strength behind an uptrend. The reverse holds true for downtrends. Buying/Selling Pressure Chaikin Money Flow can be used to define a general buying or selling bias simply with positive or negative values. The indicator oscillates above/below the zero line. Generally, buying pressure is stronger when the indicator is positive and selling pressure is stronger when the indicator is negative. While this zero line cross seems simple enough, the reality is much choppier. Chaikin Money Flow sometimes only briefly crosses the zero line with a move that turns the indicator barely positive or negative. There is no follow through and this zero line cross ends up becoming a whipsaw (bad signal). Chartists can filter these signals with buffers by setting the bullish threshold a little above zero (+.05) and the bearish threshold a little below zero (-.05). These thresholds will not entirely eliminate bad signals, but can help reduce whipsaws and filter out weaker signals.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 3/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The chart above shows Freeport McMoran (FCX) with 20-day Chaikin Money Flow in the indicator window. There were at least 10 crosses of the zero line between February and December 2010. Adding a small buffer greatly reduced the number of bullish and bearish signals. A move above +.50 was considered bullish, while a move below -.50 was considered bearish. There were only three signals. While these signals will come a little later, it may be worth it to reduce whipsaw.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 4/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The chart for Harley Davidson (HOG) shows a few good signals and a whipsaw with the May bounce. CMF moved above .50 for a few days, but this move failed to hold and the indicator broke back below -.50 in early June. Whipsaws are going to happen, especially during volatile periods or when the trend flattens. CMF turned bullish in July and stayed bullish the rest of the year. Notice that HOG formed a falling wedge that retraced just over 62% in August, when CMF was still in bull mode. This pullback offered a second chance to partake in the CMF signal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 5/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Chaikin Money Flow is not suited for all securities. The chart above shows P.F. Chang (PFCB) with some 18 crosses above +.50 or below -.50. Basing CMF signals on these crosses resulted in one whipsaw after another. It is important to analyze the basic price trend and the characteristics of an indicator with a particular security. PFCB exhibits some trend, but price action within this trend is choppy and money flow cannot maintain a positive or negative bias. It would be better to find a different indicator for this stocks. Calculation Quirk The Money Flow Multiplier in Chaikin Money Flow focuses on the level of the close relative to the high-low range for a given period (day, week, month). With this formula, a security could gap down and close significantly lower, but the Money Flow Multiplier would rise if the close were above the midpoint of the high-low range. The chart below shows Clorox (CLX) with a big gap down and a close near the top of the days high-low range. Even though the stock closed sharply lower on high volume, Chaikin Money Flow rose because the Money Flow Multiplier was positive and volume was well above average. Ignoring the change from close-to-close means that Chaikin Money Flow can sometimes disconnect with price.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 6/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com The opposite can happen when a security gaps up and closesnear the low for the day. The chart below shows Travellers (TRV) gapping up and closing over 1% higher on the day. Despite this jump, the close was near the low for the day, which insured a Money Flow Multiplier near -1. As a result, almost all of the days volume was counted as negative money flow and the Chaikin Money Flow fell.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 7/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Conclusions Chaikin Money Flow is an oscillator that measures buying and selling pressure over a set period of time. At its most basic, money flow favors the bulls when CMF is positive and the bears when negative. Chartists looking for quicker money flow shifts can look for bullish and bearish divergences. Be careful though. Selling pressure still has the edge in negative territory, even when there is a bullish divergence. This bullish divergence simply shows less selling pressure. It takes a move into positive territory to indicate actual buying pressure. As an money flow oscillator, CMF can be used in conjunction with pure price oscillators, such as MACD or RSI. As with all indicators, Chaikin Money Flow should not be used as a stand-alone indicator. Marc Chaikin also developed the Accumulation Distribution Line and the Chaikin Oscillator. SharpCharts Chaikin Money Flow can be set as an indicator above or below the main window. Because it is shown in area format, it is not really suited for placement behind the securitys price plot. Once the indicator is chosen from the drop down list, the default parameter appears (20). These parameters can be adjusted to increase or decrease sensitivity. Users can click on "advanced options" to add horizontal lines, moving averages or other overlays. Chartists can even plot a second and longerstockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 8/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Chaikin Money Flow indicator on top of the other. Periods of overlap show when money flow is strong for two different periods. Click here for a live example. Suggested Scans Chaikin Money Flow Turns Positive and RSI Moves Above 50: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 in daily volume over the last 60 days. Accumulation and buying pressure is identified when Chaikin Money Flow moves into positive territory. Price momentum confirms when RSI moves above 50, its centerline. This scan is meant as a starting point for further analysis and due diligence. Chaikin Money Flow Turns Negative and RSI Moves Below 45: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 in daily volume over the last 60 days. Distribution and selling pressure are identified when Chaikin Money Flow moves into negative territory. Price momentum confirms when RSI moves below 50, its centerline. This scan is meant as a starting point for further analysis and due diligence.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 9/10
• 6/1/12 Chaikin Money Flow - ChartSchool - StockCharts.com Further Study This book covers it all with explanations that are simple and clear. Murphy covers most the major charts patterns and indicators. A complete chapter is devoted to understanding volume and open interest. Technical Analysis of the Financial Markets John J. Murphy Send us your Feedback! Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_money_flow_c 10/10
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Chaikin Oscillator Chaikin Oscillator Introduction Developed by Marc Chaikin, the Chaikin Oscillator measures the momentum of the Accumulation Distribution Line using the MACD formula. This makes it an indicator of an indicator. The Chaikin Oscillator is the difference between the 3-day EMA of the Accumulation Distribution Line and the 10-day EMA of the Accumulation Distribution Line. Like other momentum indicators, this indicator is designed to anticipate directional changes in the Accumulation Distribution Line by measuring the momentum behind the movements. A momentum change is the first step to a trend change. Anticipating trend changes in the Accumulation Distribution Line can help chartists anticipate trend changes in the underlying security. The Chaikin Oscillator generates signals with crosses above/below the zero line or with bullish/bearish divergences. Calculation Calculating the Accumulation Distribution Line (ADL) is the first step to the Chaikin Oscillator. This article will cover the basic elements of the Accumulation Distribution Line. See our ChartSchool article the details. There are three steps to calculating the Accumulation Distribution Line (ADL). First, calculate the Money Flow Multiplier. Second, multiply this value by volume to find Money Flow Volume. Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line (ADL). Fourth, take the difference between two moving averages to calculate the Chaikin Oscillator. 1 MnyFo Mlile =[Coe - Lw -(ih-Coe]/Hg -Lw . oe lw utpir (ls o) Hg ls) (ih o) 2 MnyFo Vlm =MnyFo Mlile xVlm frtePro . oe lw oue oe lw utpir oue o h eid 3 AL=Peiu AL+CretPro MnyFo Vlm . D rvos D urn eids oe lw oue 4 CaknOclao =(-a EAo AL . hii siltr 3dy M f D) - (0dyEAo AL 1-a M f D) The Accumulation Distribution Line rises when the Money Flow Multiplier is positive and falls when negative. This multiplier is positive when the close is in the upper a half of the periods high-low range and negative when the close is in the lower half. As a MACD type oscillator, the Chaikin Oscillator turns positive when the faster 3-day EMA moves above the slower 10-day EMA. Conversely, the indicator turns negative when the 3-day EMA moves below the 10-day EMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 1/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com The chart above shows the Accumulation Distribution Line (gray) with the 3-day EMA in (blue) and the 10-day EMA (red). The price for General Electric (GE) is invisible so we can focus on the relationship between the Accumulation Distribution Line and the Chaikin Oscillator. Notice how the Chaikin Oscillator moves into negative territory as the 3-day EMA moves below the 10-day EMA. Conversely, the oscillator turns positive when the 3-day EMA crosses above the 10-day EMA. Interpretation First and foremost, it is important to remember that the Chaikin Oscillator is an indicator of an indicator. It measures momentum for the Accumulation Distribution Line. This makes it at least three steps removed from the price of the underlying security. First, price and volume are reshaped into the Accumulation Distribution Line. Second, exponential moving averages are applied to the Accumulation Distribution Line. Third, the difference between the moving averages is used to form the Chaikin Oscillator. As the third derivative, the indicator is more prone to disconnect from the price of the underlying security.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 2/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com Having clarified that, the indicator is designed to measure the momentum behind buying and selling pressure (Accumulation Distribution Line). A move into positive territory indicates that the Accumulation Distribution Line is rising and buying pressure prevails. A move into negative territory indicates that the Accumulation Distribution Line is falling and selling pressure prevails. Chartists can anticipate crosses into positive or negative territory by looking for bullish or bearish divergences, respectively. Buying/Selling Bias The Chaikin oscillator can be used to define a general buying or selling bias simply with positive or negative values. The indicator oscillates above/below the zero line. Generally, buying pressure is stronger when the indicator is positive and selling pressure is stronger when the indicator is negative. The default settings for the Chaikin Oscillator (3,10) often produce a line that frequently crosses zero. Chartists can smooth the indicator by lengthening the moving averages. The example below shows the Chaikin Oscillator (6,20). Both moving averages were doubled to maintain the ratio and smooth the indicator.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 3/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com The Chaikin Oscillator for US Steel (X) crossed the zero line six times over 12 months. There were some good signals, such as the April sell signal and the October buy signal. There were also some bad signals or whipsaws. The key, as with all indicators, is to confirm the oscillator signals with other aspects of technical analysis, such as a pure price momentum oscillator or pattern analysis.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 4/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com The chart for Alcoa (AA) shows six zero-line crosses in 2010. The first five did not generate good signals, but the sixth was a dandy. Chartists should experiment with the settings and consider adding trendlines to enhance their analysis. Trendline breaks are often earlier than zero line crosses. A trendline also captures the direction of the indicator. A rising Chaikin Oscillator reflects a steady increase in buying pressure. A falling Chaikin Oscillator reflects a steady increase in selling pressure. Divergences Bullish and bearish divergences alert chartists to a momentum shift in buying or selling pressure that can foreshadow a trend reversal on the price chart. A bullish divergence forms when price moves to new lows and the Chaikin Oscillator forms a higher low. This higher low shows less selling pressure. It is important to wait for some sort of confirmation, such as an upturn in the indicator or a cross into positive territory. A move into positive territory shows upside momentum in the Accumulation Distribution Line. The Fastenal (FAST) chart shows five divergences for the Chaikin Oscillator in 2010. The default settings (3,10) produce a rather sensitive oscillator that will generate many divergences. The key is to differentiate the robust signals from the bogus signals by waiting for confirmation. Even with a bullish divergence, selling pressure outweighs buying pressure until there is a cross above the zero line. Buying pressure dominates until there is a cross into negative territory.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 5/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com The green lines show the Chaikin Oscillator forming a higher low as the stock forms a lower low for a bullish divergence. The green dotted lines show when the indicator moves into positive territory to confirm the signal. The mid February, early September and late November signals were great. The mid June buy signal would have resulted in a whipsaw and there was not much weakness after the October sell signal from the bearish divergence. A bearish divergence forms when price moves to a new high and the Chaikin Oscillator fails to confirm this higher highs. This failure reflects less buying pressure that can sometimes foreshadow a bearish reversal on the price chart. Confirmation comes when the oscillator moves into negative territory.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 6/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com The chart for Kohls (KSS) shows three bearish divergences and two bullish divergences over a 12 month period. The bearish divergences (red lines) were confirmed when the Chaikin Oscillator moved into negative territory to show actual downside momentum in the Accumulation Distribution Line. Remember, the Chaikin Oscillator (3,10) turns negative when the 3-day EMA of the Accumulation Distribution Line moves below the 10-day EMA. Conclusions The Chaikin Oscillator is a momentum indicator for the Accumulation Distribution Line. Basically, the Chaikin Oscillator turbo charges the Accumulation Distribution Line by measuring momentum. Signals are more frequent and often easier to quantify using the Chaikin Oscillator. As an money flow oscillator it can be used in conjunction with pure price oscillators, such as MACD or RSI. As with all indicators, the Chaikin Oscillator should not be used as a stand-alone indicator. SharpCharts The Chaikin Oscillator can be set as an indicator above, below or behind a securitys price plot. It is easy to compare indicator/price movements when the indicator is placed behind the price plot. Once the indicator is chosen from the drop down list, the default parameter setting appears (3,10). These parameters can be adjusted to increase or decrease sensitivity. Users can click on "advanced options" to add a horizontal line or moving average. Click here for a live example.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 7/9
• 6/1/12 Chaikin Oscillator - ChartSchool - StockCharts.com Suggested Scans Chaikin Oscillator Turns Positive and RSI Moves Above 55: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 in daily volume over the last 60 days. Upturns on good volume are identified when the Chaikin Oscillator moves above +1000, which is just above its centerline (0). This is confirmed with price momentum because RSI is required to move above 55, which is just above its centerline (50). This scan is meant as a starting point for further analysis and due diligence. Chaikin Oscillator Turns Negative and RSI Moves Below 45: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 in daily volume over the last 60 days. Downturns on good volume are identified when the Chaikin Oscillator moves below -1000, which is just below its centerline (0). This is confirmed with price momentum because RSI is required to move below 45, which is just below its centerline (50). This scan is meant as a starting point for further analysis and due diligence.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:chaikin_oscillator 8/9
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Detrended Price Oscillator (DPO) Detrended Price Oscillator (DPO) Introduction The Detrended Price Oscillator (DPO) is an indicator designed to remove trend from price and make it easier to identify cycles. DPO does not extend to the last date because it is based on a displaced moving average. However, alignment with the most recent is not an issue because DPO is not a momentum oscillator. Instead, DPO is used to identify cycles highs/lows and estimate cycle length. Calculation Pie{/ +1 prosaols teXpro sml mvn aeae rc X2 } eid g es h -eid ipe oig vrg. Xrfr t tenme o prosue t cluaeteDteddPie ees o h ubr f eid sd o aclt h erne rc Oclao.A2-a DOwuduea2-a SAta i dslcdb 1 siltr 0dy P ol s 0dy M ht s ipae y 1 pros{02+1=1} Ti dslcmn sit te2-a SA1 dy eid 2/ 1. hs ipaeet hfs h 0dy M 1 as t telf,wihatal pt i i temdl o telo-ak o h et hc culy us t n h ide f h okbc pro.Tevleo te2-a SAi te sbrce fo tepie eid h au f h 0dy M s hn utatd rm h rc i temdl o ti lo-akpro.I sot DO2)eul pie n h ide f hs okbc eid n hr, P(0 qas rc 1 dy aols te2-a SA 1 as g es h 0dy M. Displaced Moving Average The moving average displacement actually centers the moving average. Consider a 20-day simple moving average offset 11 days to the left. There are 10 days in front of the moving average, 1 day at the moving average and 9 days behind the moving average. In reality, this moving average is in the middle of its look-back period. Roughly half the prices used in the calculation are to the right and half are to the left. Chart 1 shows the S&P 500 ETF (SPY) with a 20-day SMA (green dotted line) and a 20-day SMA offset 11 days (pink line). The ending values are the same (106.84), but the pink moving average ends on October 27th and the green moving average ends on November 11th, which is the last date on the chart. Also notice how the "centered" moving average (pink) more closely follows the actual price plot.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 1/7
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com What Does DPO Measure? The Detrended Price Oscillator (DPO) measures the difference between a past price and a moving average. Keep in mind that DPO is itself displaced to the left. The indicator oscillates above/below zero as prices move above/below the displaced moving average. Chart 2 shows the S&P 500 ETF (SPY) with a 20-day moving average displaced -11 days. 20-day DPO is shown in the indicator window. Notice how DPO is positive when price is above the displaced moving average and negative when price is below the displaced moving average.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 2/7
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com Using DPO Even though this indicator looks like a classic oscillator, it is not designed for momentum signals. The displaced moving average is set in the past and this is why the DPO is shown in the past. Even with this displacement, DPO peaks and troughs can be used to estimate cycle length. DPO filters out the longer trends to focus on shorter cycles. Chart 3 shows the Nasdaq 100 ETF (QQQQ) with DPO (20) in the indicator window. Looking at the peaks and troughs, we can see a 20- day cycle with the lows in early September, early October, early November and early December. There are roughly 20 days between these lows. The cycle missed in early January.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 3/7
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com To Shift or not to Shift It is possible to displace the Detrended Price Oscillator (DPO) with a horizontal shift to the right. If DPO is set at 20, then an 11 period shift is needed to place it in line with the most recent price. This displacement number comes from the formula at the top (20/2 + 1) = 11. While shifting may seem like a good idea, it really defeats the purpose of this indicator, which is to identify cycles.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 4/7
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com Even with a positive displacement, DPO fluctuations do not match up well with prices. In the example below, the last value for DPO (20,11) is still based on the close 11 days ago and the value of the moving average. Notice that DPO turned negative as price moved below the centered moving average 11 days ago (orange box). DPO simply does not match current price action. In contrast to DPO, price has been below the 20-day EMA the last 12 days. The Percentage Price Oscillator (PPO) is better suited to identify overbought and oversold levels. PPO(1,20,1) shows the percentage difference between current price and the normal 20-day exponential moving average. Overbought/oversold conditions occur when prices get relatively far from their 20-day EMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 5/7
• 6/1/12 Detrended Price Oscillator (DPO) - ChartSchool - StockCharts.com Conclusions The Detrended Price Oscillator shows the difference between a past price and a simple moving average. In contrast to other price oscillators, DPO is not a momentum indicator. Instead, it is simply designed to identify cycles with its peaks and troughs. Cycles can be estimated by counting the periods between peaks or troughs. Users can experiment with shorter and longer DPO settings to find the best fit. DPO and SharpCharts The Detrended Price Oscillator (DPO) can be found in the indicator list on SharpCharts. The default parameter is 20 periods, but this can be adjusted accordingly to find cycles. Users can also add another parameter separated by a comma. A comma plus a positive number shifts the indicator to the right. DPO can be positioned above, below or behind the price plot. Click here for a live example of the Detrended Price Oscillator. Suggested Scansstockcharts.com/school/doku.php?id=chart_school:technical_indicators:detrended_price_osci 6/7
• 6/2/12 Force Index - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Force Index Force Index Introduction The Force Index is an indicator that uses price and volume to assess the power behind a move or identify possible turning points. Developed by Alexander Elder, the Force Index was introduced in his classic book, Trading for a Living. According to Elder, there are three essential elements to a stocks price movement: direction, extent and volume. The Force Index combines all three as an oscillator that fluctuates in positive and negative territory as the balance of power shifts. The Force Index can be used to reinforce the overall trend, identify playable corrections or foreshadow reversals with divergences. Calculation FreIdx1 ={ls (urn pro) - Coe(ro pro) xVlm oc ne() Coe cret eid ls pir eid} oue FreIdx1)=1-eidEAo FreIdx1 oc ne(3 3pro M f oc ne() Calculation for the one period Force Index is straight forward. Simply subtract the prior close from the current close and multiply by volume. The Force Index for more than one day is simply an exponential moving average of the 1-period Force Index. For example, a 13-Period Force Index is a 13-period EMA of the 1-period Force Index values for the last 13 periods. Three factors affect Force Index values. First, the Force Index is positive when the current close is above the prior close. The Force Index is negative when the current close is below the prior close. Second, the extent of the move determines the volume multiplier. Bigger moves warrant larger multipliers that influence the Force Index accordingly. Small moves produce small multipliers that reduce the influence. Third, volume plays a key role. A big move on big volume produces a high Force Index values. Small moves on low volume produce relatively low Force Index values. The table below shows the Force Index calculations for Pfizer (PFE). Line 27 marks the biggest move (+84 cents) and the biggest volume (162,619). This combination produces the biggest Force Index value on the table (136,600).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 1/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com The chart above shows the Force Index in action. Notice how the 1-period Force Index fluctuates above/below the zero line and looks quite jagged. Elder recommends smoothing the indicator with a 13-period EMA to reduce the positive-negative crossovers. Chartists should experiment with different smoothing periods to determine what best suits their analytical needs.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 2/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com Interpretation As noted above, there are three elements to the Force Index. First, there is either a positive or negative price change. A positive price change signals that buyers were stronger than sellers, while a negative price change signals that sellers were stronger than buyers. Second, there is the extent of the price change, which is simply the current close less the prior close. The "extent" shows us just how far prices moved. A big advance shows strong buying pressure, while a big decline shows strong selling pressure. The third and final element is volume, which, according to Elder, measures commitment. Just how committed are the buyers and sellers? A big advance on heavy volume shows a strong commitment from buyers. Likewise, a big decline on heavy volume shows a strong commitment from sellers. The Force Index quantifies these three elements into one indicator that measures buying and selling pressure.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 3/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com Trend Identification The Force Index can be used to reinforce or determine the trend. The trend in question, short-term, medium-term or long- term, depends on the Force Index parameters. While the default Force Index parameter is 13, chartists can use a higher number for more smoothing or a lower number for less smoothing. The chart below shows Home Depot with a 100-day Force Index and a 13-day Force Index. Notice how the 13-day Force Index is more volatile and jagged. The 100-day Force Index is smoother and crosses the zero line fewer times. In this regard, the 100-day Force Index can be used to determine the medium or long-term trend. Notice how a resistance breakout on the price chart corresponds to a resistance breakout on the 100-day Force Index. The 100-day Force Index moved into positive territory and broke resistance in mid February. The indicator remained positive during the entire uptrend and turned negative in mid May. The early June support break on the price chart was confirmed with a support break in the Force Index. Divergences Bullish and bearish divergence can alert chartists of a potential trend change. Divergences are classic signals associate with oscillators. A bullish divergence forms when the indicator moves higher as the security moves lower. The indicator is not confirming weakness in price and this can foreshadow a bullish trend reversal. A bearish divergence forms when thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 4/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com indicator moves lower as the security moves higher. Even though the security is moving higher, the indicator shows underlying weakness by moving lower. This discrepancy can foreshadow a bearish trend reversal. Confirmation is an important part of bullish and bearish divergences. Even though the divergences signal something is amiss, confirmation from the indicator or price chart is needed. A bullish divergence can be confirmed with the Force Index moving into positive territory or a resistance breakout on the price chart. A bearish divergence can be confirmed with the Force Index moving into negative territory or a support break on the price chart. Chartists can also use candlesticks, moving average crosses, pattern breaks and other forms of technical analysis for confirmation. The chart above shows Best Buy (BBY) with the Force Index (39) sporting a series of divergences. The green lines show bullish divergences, while the red lines show bearish divergences. A bullish divergence is confirmed when the Force Index (39) crosses into positive territory (green dotted lines). A bearish divergence is confirmed when the Force Index (39) crosses into negative territory (red dotted lines). Chartists can also use trendline breaks on the price chart for confirmation. This chart shows two versions of the Force Index. The Force Index (13) captures short-term fluctuations and is more sensitive. The Force Index (39) captures medium-term fluctuations and is smoother. The 39-day Force Index produces fewer zero line crossovers and these crossovers last longer. There is no right or wrong answer for these settings. It depends on trading objectives, time horizon and analytical style.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 5/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com Identifying Corrections The Force Index can be used in conjunction with a trend following indicator to identify short-term corrections within that trend. A pullback from overbought levels represents a short-term correction within an uptrend. An oversold bounce represents a short-term correction within a downtrend. Yes, corrections can be up or down, it depends on the direction of the bigger trend. Alexander Elder recommends using a 22-day EMA for trend identification and a 2-day Force Index to identify corrections. The trend is up when the 22-day EMA is moving higher, which means the 2-day Force Index would be used to identify short-term pullbacks for buying. The trend is down when the 22-day EMA is moving lower, which means the 2-day Force Index would be used to identify short-term bounces for selling. This is an aggressive strategy best suiting for active traders. The timeframe can be adjusted by using a longer moving average and timeframe for the Force Index. For example, medium-term traders might experiment with a 100-day EMA and 10-day Force Index. There are two-schools of thought regarding the correction play. Traders can either act as soon as the correction is evident or act when there is evidence the correction has ended. Lets look at an example with the 22-day EMA and 2-day Force Index. Keep in mind that this is designed to identify very short corrections within a bigger trend. The chart below shows Texas Instruments (TXN) with the 22-day EMA turning up in mid September. With the 22-day EMA rising, traders are looking for very short-term pullbacks when the 2-day Force Index turns negative. Traders can act when the Force Index turns negative or wait for it to move back into positive territory. Acting when negative may improve the reward-to-risk ratio, but the correction could extend a few more days. Waiting for the Force Index to turn positive again shows some strength that could signal the correction has ended. The green dotted lines show when the 2- day Force Index turns negative. Conclusionsstockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 6/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com The Force Index is uses both price and volume to measure buying and selling pressure. The price portion covers the trend, while the volume portion determines the intensity. At its most basic, chartists can use a long-term Force Index to confirm the underlying trend. The bulls have the edge when the 100-day Force Index is positive. The bears have the edge when the 100-day Force Index is negative. Armed with this information, traders can then look for short-term setups in harmony with the larger trend, such as bullish setups in a larger uptrend or bearish setups within a larger downtrend. As with all indicators, traders should use the Force Index in conjunction with other indicators and analysis techniques. Using with SharpCharts The Force Index is available as an indicator for SharpCharts. Once selected, users can place the indicator above, below or behind the underlying price plot. Placing the Force Index directly on top of the price plot accentuates the movements relative to price action of the underlying security. This can make it easier to identify bullish and bearish divergences. Chartists can click "advanced options" to add a moving average, horizontal line or other indicator to the Force Index.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 7/9
• 6/2/12 Force Index - ChartSchool - StockCharts.com Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:force_index 9/9
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Moving Average Convergence- Divergence (MACD) Moving Average Convergence-Divergence (MACD) Introduction Developed by Gerald Appel in the late seventies, the Moving Advertisement Average Convergence-Divergence (MACD) indicator is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, the MACD offers the best of both worlds: trend following and momentum. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because the MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels. Note: MACD can be pronounced as either "MAC-DEE" or "M-A-C- D". Here is an example chart with the MACD indicator in the lower panel: Click the chart to see a live example.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 1/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Calculation MC Ln:(2dyEA-2-a EA AD ie 1-a M 6dy M) Sga Ln:9dyEAo MC Ln inl ie -a M f AD ie MC Hsorm MC Ln -Sga Ln AD itga: AD ie inl ie The MACD Line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line and identify turns. The MACD Histogram represents the difference between MACD and its 9-day EMA, the Signal line. The histogram is positive when the MACD Line is above its Signal line and negative when the MACD Line is below its Signal line. The values of 12, 26 and 9 are the typical setting used with the MACD, however other values can be substituted depending on your trading style and goals. Interpretation As its name implies, the MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the moving averages move towards each other. Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movements. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security. The MACD Line oscillates above and below the zero line, which is also known as the centerline. These crossovers signal that the 12-day EMA has crossed the 26-day EMA. The direction, of course, depends on direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD values indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 2/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com In the example above, the yellow area shows the MACD Line in negative territory as the 12-day EMA trades below the 26- day EMA. The initial cross occurred at the end of September (black arrow) and the MACD moved further into negative territory as the 12-day EMA diverged further from the 26-day EMA. The orange area highlights a period of positive MACD values, which is when the 12-day EMA was above the 26-day EMA. Notice that the MACD Line remained below 1 during this period (red dotted line). This means the distance between the 12-day EMA and 26-day EMA was less than 1 point, which is not a big difference. Signal Line Crossovers Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of the MACD Line. As a moving average of the indicator, it trails the MACD and makes it easier to spot MACD turns. A bullish crossover occurs when the MACD turns up and crosses above the signal line. A bearish crossover occurs when the MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move. Due diligence is required before relying on these common signals. Signal line crossovers at positive or negative extremes should be viewed with caution. Even though the MACD does not have upper and lower limits, chartists can estimate historical extremes with a simple visual assessment. It takes a strong move in the underlying security to push momentum to an extreme. Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover at the extremities. Volatility in the underlying security can also increase the number of crossovers. The chart below shows IBM with its 12-day EMA (green), 26-day EMA (red) and the 12,26,9 MACD in the indicator window. There were eight signal line crossovers in six months: four up and four down. There were some good signals and some bad signals. The yellow area highlights a period when the MACD Line surged above 2 to reach a positive extreme. There were two bearish signal line crossovers in April and May, but IBM continued trending higher. Even though upward momentum slowed after the surge, upward momentum was still stronger than downside momentum in April-May. The third bearish signal line crossover in May resulted in a good signal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 3/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Centerline Crossovers Centerline crossovers are the next most common MACD signals. A bullish centerline crossover occurs when the MACD Line moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when the MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA. Centerline crossovers can last a few days or a few months. It all depends on the strength of the trend. The MACD will remain positive as long as there is a sustained uptrend. The MACD will remain negative when there is a sustained downtrend. The next chart shows Pulte Homes (PHM) with at least four centerline crosses in nine months. The resulting signals worked well because strong trends emerged with these centerline crossovers.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 4/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Below is a chart of Cummins Inc (CMI) with seven centerline crossovers in five months. In contrast to Pulte Homes, these signals would have resulted in numerous whipsaws because strong trends did not materialize after the crossovers. The next chart shows 3M (MMM) with a bullish centerline crossover in late March 2009 and a bearish centerline crossover in early February 2010. This signal lasted 10 months. In other words, the 12-day EMA was above the 26-day EMA for 10stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 5/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com months. This was one strong trend. Divergences Divergences form when the MACD diverges from the price action of the underlying security. A bullish divergence forms when a security records a lower low and the MACD forms a higher low. The lower low in the security affirms the current downtrend, but the higher low in the MACD shows less downside momentum. Despite less downside momentum, downside momentum is still outpacing upside momentum as long as the MACD remains in negative territory. Slowing downside momentum can sometimes foreshadows a trend reversal or a sizable rally. The next chart shows Google (GOOG) with a bullish divergence in October-November 2008. First, notice that we are using closing prices to identify the divergence. The MACDs moving averages are based on closing prices and we should consider closing prices in the security as well. Second, notice that there were clear reaction lows (troughs) as both Google and its MACD Line bounced in October and late November. Third, notice that the MACD formed a higher low as Google formed a lower low in November. The MACD turned up with a bullish divergence with a signal line crossover in early December. Google confirmed a reversal with resistance breakout.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 6/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com A bearish divergence forms when a security records a higher high and the MACD Line forms a lower high. The higher high in the security is normal for an uptrend, but the lower high in the MACD shows less upside momentum. Even though upside momentum may be less, upside momentum is still outpacing downside momentum as long as the MACD is positive. Waning upward momentum can sometimes foreshadow a trend reversal or sizable decline. Below we see Gamestop (GME) with a large bearish divergence from August to October. The stock forged a higher high above 28, but the MACD Line fell short of its prior high and formed a lower high. The subsequent signal line crossover and support break in the MACD were bearish. On the price chart, notice how broken support turned into resistance on the throwback bounce in November (red dotted line). This throwback provided a second chance to sell or sell short.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 7/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Divergences should be taken with caution. Bearish divergences are commonplace in a strong uptrend, while bullish divergences occur often in a strong downtrend. Yes, you read that right. Uptrends often start with a strong advance that produces a surge in upside momentum (MACD). Even though the uptrend continues, it continues at a slower pace that causes the MACD to decline from its highs. Upside momentum may not be as strong, but upside momentum is still outpacing downside momentum as long as the MACD Line is above zero. The opposite occurs at the beginning of a strong downtrend. The next chart shows the S&P 500 ETF (SPY) with four bearish divergences from August to November 2009. Despite less upside momentum, the ETF continued higher because the uptrend was strong. Notice how SPY continued its series of higher highs and higher lows. Remember, upside momentum is stronger than downside momentum as long as its MACD is positive. Its MACD (momentum) may have been less positive (strong) as the advance extended, but it was still largely positive.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 8/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Conclusions The MACD indicator is special because it brings together momentum and trend in one indicator. This unique blend of trend and momentum can be applied to daily, weekly or monthly charts. The standard setting for MACD is the difference between the 12 and 26-period EMAs. Chartists looking for more sensitivity may try a shorter short-term moving average and a longer long-term moving average. MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for weekly charts. Chartists looking for less sensitivity may consider lengthening the moving averages. A less sensitive MACD will still oscillate above/below zero, but the centerline crossovers and signal line crossovers will be less frequent. The MACD is not particularly good for identifying overbought and oversold levels. Even though it is possible to identify levels that are historically overbought or oversold, the MACD does not have any upper or lower limits to bind its movement. During sharp moves, the MACD can continue to over-extend beyond its historical extremes. Finally, remember that the MACD Line is calculated using the actual difference between two moving averages. This means MACD values are dependent on the price of the underlying security. The MACD values for a \$20 stocks may range from -1.5 to 1.5, while the MACD values for a \$100 may range from -10 to +10. It is not possible to compare MACD values for a group of securities with varying prices. If you want to compare momentum readings, you should use the Percentage Price Oscillator (PPO), instead of the MACD. Adding the MACD Indicator to StockCharts Charts The MACD can be set as an indicator above, below or behind a securitys price plot. Placing the MACD "behind" the makes it easy to compare momentum movements with price movements. Once the indicator is chosen from the drop down list, the default parameter setting appears (12,26,9). These parameters can be adjusted to increase sensitivity or decrease sensitivity. The MACD-Histogram appears with the indicator or can be added a separate indicator. Setting the signal line to 1 (12,26,1) will remove the MACD histogram and the signal line. A separate signal line, without the histogram, can be added by choosing "Advanced Options/Exp Mov Avg".stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 9/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com Click here for a live chart of the MACD indicator. Using the MACD with StockCharts Scans Here are some sample scans that StockCharts members can use to scan for various MACD signals:stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 10/11
• 6/2/12 Moving Average Convergence-Divergence (MACD) - ChartSchool - StockCharts.com MACD Bullish Signal Line Cross: This scan reveals stocks that are trading above their 200-day moving average and have a bullish signal line crossover in MACD. Also notice that MACD is required to be negative to insure this upturn occurs after a pullback. This scan is just meant as a starter for further refinement. MACD Bearish Signal Line Cross: This scan reveals stocks that are trading below their 200-day moving average and have a bearish signal line crossover in MACD. Also notice that MACD is required to be positive to insure this downturn occurs after a bounce. This scan is just meant as a starter for further refinement. Further Study From the creator, these books offer a comprehensive study to using and interpreting MACD. Understanding MACD Technical Analysis - Power Tools for Active Investors Gerald Appel and Edward Dobson Gerald Appel Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve 11/11
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » MACD-Histogram MACD-Histogram Introduction Developed by Thomas Aspray in 1986, the MACD-Histogram measures the distance between MACD and its signal line (the 9-day EMA of MACD). Like MACD, the MACD-Histogram is also an oscillator that fluctuates above and below the zero line. Aspray developed the MACD-Histogram to anticipate signal line crossovers in MACD. Because MACD uses moving averages and moving averages lag price, signal line crossovers can come late and affect the reward-to-risk ratio of a trade. Bullish or bearish divergences in the MACD-Histogram can alert chartists to an imminent signal line crossover in MACD. See our Chart School article for more on MACD. Calculation MC:(2dyEA-2-a EA AD 1-a M 6dy M) Sga Ln:9dyEAo MC inl ie -a M f AD MC Hsorm MC -Sga Ln AD itga: AD inl ie Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used to form the moving averages so MACD. A 9-day EMA of MACD is plotted along side to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 1/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Four Steps Removed The MACD-Histogram is an indicator of an indicator. In fact, MACD is also an indicator of an indicator. This means that the MACD-Histogram is four steps removed from the price of the underlying security. In other words, it is the fourth derivative of price. First derivative: 12-day EMA and 26-day EMA Second derivative: MACD (12-day EMA less the 26-day EMA) Third derivative: MACD signal line (9-day EMA of MACD) Fourth derivative: MACD-Histogram (MACD less MACD signal line) The base for this indicator is the securitys price. It takes four steps to get from the actual price to the MACD-Histogram. Talk about massaging the data. While not necessarily a bad thing, chartists should keep this in mind when analyzing the MACD-Histogram. It is an indicator of an indicator. Therefore, it is designed to anticipate signals in MACD, which in turn is designed to identify changes in the price momentum of the underlying security. Interpretation As with MACD, the MACD-Histogram is also designed to identify convergence, divergence and crossovers. The MACD- Histogram, however, is measuring the distance between MACD and its signal line. The histogram is positive when MACD is above its signal line. Positive values increase as MACD diverges further from its signal line (to the upside). Positive values decrease as MACD and its signal line converge. The MACD-Histogram crosses the zero line as MACD crosses below its signal line. The indicator is negative when MACD is below its signal line. Negative values increase as MACD diverges further from its signal line (to the downside). Conversely, negative values decrease as MACD converges on its signal line.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 2/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Chart 1 shows Darden Restaurants (DRI) with MACD and the MACD-Histogram. A bearish signal line crossover occurred in late September and this turned the MACD-Histogram positive (yellow area). A bullish signal line crossover occurred in early December and this turned the MACD-Histogram positive the rest of the month (yellow area). There was a period of divergence as MACD moved further from its signal line (green line) and a period of convergence as MACD moved closer to its signal line (red line). Peak-Trough Divergence The MACD-Histogram anticipates signal line crossovers in MACD by forming bullish and bearish divergences. These divergences signal that MACD is converging on its signal line and could be ripe for a cross. There are two types of divergences: peak-trough and slant. A peak-trough divergence forms with two peaks or two troughs in the MACD- Histogram. A peak-trough bullish divergence forms when MACD forges a lower low and the MACD-Histogram forges a higher low. Well-defined troughs are important to the robustness of a peak-trough divergence. Chart 2 shows Caterpillar with a bullish divergence in the MACD-Histogram. Notice that MACD moved to a lower low in June-July, but the MACD- Histogram formed a higher low (trough). There are two distinct troughs. This bullish divergence foreshadowed the bullish signal line crossover in mid July and a big rally.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 3/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Chart 3 shows Aeropostale (ARO) with a bearish divergence in August-September 2009. MACD moved to a new high in September, but the MACD-Histogram formed a lower high. Notice that there are two definitive peaks (higher) with a dip in between on the MACD-Histogram (red line). The subsequent bearish signal line crossover foreshadowed a sharp decline in the stock.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 4/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Slant Divergence As its name implies, slant divergences form without well-defined peaks or troughs. Instead of two reaction highs, there is simply a slant lower as the MACD-Histogram moves towards the zero line. This slant towards the zero line reflects a convergence between MACD and its signal line. In other words, they are getting closer to each other. Momentum shows strength when MACD is moving away from its signal line and the MACD-Histogram expands. Momentum weakens as MACD moves closer to its signal line and the MACD-Histogram contracts. Contracting MACD-Histogram is the first step towards a signal line crossover. Chart 4 shows Boeing with a classic slant divergence in the MACD-Histogram. MACD moved sharply lower after the bearish signal line crossover in June 2009. MACD moved to a new low in mid July, but the MACD-Histogram held well above its prior low. In fact, the MACD-Histogram bottomed towards the end of June and formed a bullish slant divergence. The thick red lines show the distance between MACD and its signal line. It is sometimes hard to gauge distance on the chart so these lines highlight the difference between 26-June and 8-July. This slant divergence foreshadowed the bullish signal line crossover in mid July and a sharp advance in the stock. Chart 5 shows Disney (DIS) with a bearish slant divergence in May 2008. Notice how MACD continued to a new high on 16-May, but the MACD-Histogram peaked on 8-May and formed a slant divergence. The advance in MACD was losing momentum and the indicator moved below its signal line to foreshadow a sharp decline in the stock. This chart also shows a nice bullish divergence in March-April.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 5/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Conclusions The MACD-Histogram is an indicator designed to predict signal line crossovers in MACD. By extension, it is designed as an early warning system for these signal line crossovers, which are the most frequent of MACD signals. Divergences in the MACD-Histogram can be used to filter signal line crossovers, which will reduce the number of signals. Even with a filter, the robustness of MACD-Histogram divergences is still an issue. Short and shallow divergences are much more frequent than long and large divergences. In other words, divergences that develop over a few days with shallow movements are generally less robust than divergences that develop over a few weeks with more pronounced movements. The signal line crossover provides the ultimate confirmation, but aggressive traders may try to improve the reward-to-risk ratio by making their move just before the crossover. This is when the MACD-Histogram is as close to the zero line as it can be without actually making a cross, usually between -.20 and +.20. MACD-Histogram and SharpCharts MACD comes with the MACD-Histogram, but the MACD-Histogram can be shown as a stand alone indicator. This makes it much easier to identify divergences and crossovers. The MACD-Histogram can be set as an indicator above, below or behind the price plot of the underlying security. The histogram covers a lot of chart space so it is often best to place it above or below the main window. It is possible to show MACD without the histogram in the main window. Choose MACD as an indicator and change the signal line number from 9 to 1 (9,26,1). This will remove the signal line and the histogram. The signal line can be added separately by clicking the advanced indicator options and adding a 9-day EMA. Click here for a live chart featuring the MACD-Histogram.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 6/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Suggested Scans MACD-Histogram Turns Positive: First, this scan only considers stocks trading above their 200-day moving average, which implies an uptrend overall. Second, the MACD-Histogram moves from negative territory to positive territory. Also notice that MACD is required to be negative to insure this upturn occurs after a pullback. This scan is just meant as a starter for further refinement. MACD-Histogram Turns Negative: First, this scan only considers stocks trading below their 200-day moving average, which implies a downtrend overall. Second, the MACD-Histogram moves from positive territory to negative territory. Also notice that MACD is required to be positive to insure this downturn occurs after a bounce. This scan is just meant as a starter for further refinement. Further Study Understanding MACD offers a comprehensive guide to using and interpreting MACD. Technical Analysis - Power Tools for Active Investors offers a complete course in market forecasting from the creator of MACD. Short, intermediate and long term strategies are explained with many incorporating MACD.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 7/8
• 6/2/12 MACD-Histogram - ChartSchool - StockCharts.com Understanding MACD Technical Analysis - Power Tools for Active Investors Gerald Appel and Edward Dobson Gerald Appel Send us your feedback! Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:macd-histogram 8/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Money Flow Index (MFI) Money Flow Index (MFI) Introduction The Money Flow Index (MFI) is an oscillator that uses both price and volume to measure buying and selling pressure. Created by Gene Quong and Avrum Soudack, MFI is also known as volume-weighted RSI. MFI starts with the typical price for each period. Money flow is positive when the typical price rises (buying pressure) and negative when the typical price declines (selling pressure). A ratio of positive and negative money flow is then plugged into an RSI formula to create an oscillator that moves between zero and one hundred. As a momentum oscillator tied to volume, the Money Flow Index (MFI) is best suited to identify reversals and price extremes with a variety of signals. Calculation There are a several steps involved in the Money Flow Index calculation. The example below is based on a 14-period Money Flow Index, which is the default setting in SharpCharts and the setting recommended by the creators. *1 TpclPie=(ih+Lw+Coe/ . yia rc Hg o ls)3 *2 RwMnyFo =TpclPiexVlm . a oe lw yia rc oue *3 Pstv MnyFo =Smo pstv RwMnyFo oe 1 pros . oiie oe lw u f oiie a oe lw vr 4 eid. *4 Ngtv MnyFo =Smo ngtv RwMnyFo oe 1 pros . eaie oe lw u f eaie a oe lw vr 4 eid. *5 MnyFo Rto=(oiieMnyFo)(eaieMnyFo) . oe lw ai Pstv oe lw/Ngtv oe lw *6 MnyFo Idx=10-10( +MnyFo Rto . oe lw ne 0 0/1 oe lw ai) First, notice that Raw Money Flow (2) is essentially dollar volume. It is the volume multiplied by the typical price. Raw Money Flow turns into Positive Money Flow when the typical price advances from one period to the next. Raw Money Flow turns into Negative Money Flow when the typical price declines from one period to the next. The Money Flow Ratio in step 5 forms the basis for the Money Flow Index (MFI) as the0 RSI formula is applied to create a volume-weighted RSI. The table below shows a calculation example taken from an excel spreadsheet.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 1/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com Click here for an MFI calculation in an Excel Spreadsheet.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 2/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com Interpretation As a volume-weighted version of RSI, the Money Flow Index (MFI) can be interpreted similar to RSI. The big difference is, of course, volume. Because volume is added to the mix, the Money Flow Index will act a little differently than RSI. Theories suggest that volume leads prices. RSI is a momentum oscillator that already leads prices. Incorporating volume can increase this lead time. Quong and Soudack identified three basic signals using the Money Flow Index. First, chartists can look for overbought or oversold levels to warn of unsustainable price extremes. Second, bullish and bearish divergence can be used to anticipate trend reversals. Third, failure swings at 80 or 20 can also be used to identify potential price reversals. For this article, the divergences and failure swings are be combined to create one signal group and increase robustness. Overbought/Oversold Overbought and oversold levels can be used to identify unsustainable price extremes. Typically, MFI above 80 is considered overbought and MFI below 20 is considered oversold. Strong trends can present a problem for these classic overbought and oversold levels. MFI can become overbought (>80) and prices can simply continue higher when the uptrendstockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 3/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com is strong. Conversely, MFI can become oversold (<20) and prices can simply continue lower when the downtrend is strong. Quong and Soudack recommended expanding these extremes to further qualify signals. A move above 90 is truly overbought and a move below 10 is truly oversold. Moves above 90 and below 10 are rare occurrences that suggest a price move is unsustainable. Admittedly, many stocks will trade for a long time without reaching the 90/10 extremes. However, chartists can use the StockCharts.com scan engine to find those that do. Links to such scans are provided at the end of this article. JB Hunt (JBHT) became oversold when the Money Flow Index moved below 10 in late October 2009 and early February 2010. The preceding declines were sharp enough to produce these readings, but the oversold extremes suggested that these declines were unsustainable. Oversold levels alone are not reason enough to turn bullish. Some sort of reversal or upturn is needed to confirm that prices have indeed turned a corner. JBHT confirmed the first oversold reading with a gap and trendline break on good volume. The stock confirmed the second oversold reading with a resistance breakout on good volume.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 4/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com Aeropostale (ARO) became overbought when the Money Flow Index moved above 90 in late September and late December 2009. Extremes in MFI suggested that these advances were unsustainable and a pullback was imminent. The first overbought reading led to a sizable decline, but the second did not. Notice that ARO peaked with the first overbought reading and formed lower highs into October. The late October support break signaled a clear trend reversal. After the December overbought reading, ARO moved above 23 and consolidated. There were two down gaps and a support break, but these did not hold. Price action was stronger than the overbought reading. ARO ultimately broke resistance at 24 and surged back above 28. The second signal did not work. Divergences and Failures Failure swings and divergences can be combined to create more robust signals. A bullish failure swing occurs when MFI becomes oversold below 20, surges above 20, holds above 20 on a pullback and then breaks above its prior reaction high. A bullish divergence forms when prices move to a lower low, but the indicator forms a higher low to show improving money flow or momentum. On the Aetna (AET) chart below, a bullish divergence and failure swing formed in January-February 2010. First, notice how the stock formed a lower low in February and MFI held well above its January low for a bullish divergence. Second, notice how MFI dipped below 20 in January, held above 20 in February and broke its prior high in late February. This signalstockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 5/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com combination foreshadowed a strong advance in March. A bearish failure swing occurs when MFI becomes overbought above 80, plunges below 80, fails to exceed 80 on a bounce and then breaks below the prior reaction low. A bearish divergence forms when the stock forges a higher high and the indicator forms a lower high, which indicates deteriorating money flow or momentum. On the Aetna chart above, a bearish divergence and failure swing formed in August-September. The stock moved to a new high in September, but MFI formed a significantly lower high. A bearish failure swing occurred as MFI became overbought above 80 in late August, failed to reach 80 with the September bounce and broke the prior lows with a decline in late September. Conclusions The Money Flow Index is a rather unique indicator that combines momentum and volume with an RSI formula. RSI momentum generally favors the bulls when the indicator is above 50 and the bears when below 50. Even though MFI is considered a volume-weighted RSI, using the centerline to determine a bullish or bearish bias does not work as well. Instead, MFI is better suited to identify potential reversals with overbought/oversold levels, bullish/bearish divergences and bullish/bearish failure swings. As with all indicators, MFI should not be used by itself. A pure momentum oscillator, suchstockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 6/8
• 6/2/12 Money Flow Index (MFI) - ChartSchool - StockCharts.com as RSI, or pattern analysis can be combined with MFI to increase signal robustness. Using with SharpCharts The Money Flow Index is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing MFI directly behind the price makes it easy to compare indicator swings with price movements. The default setting is 14-periods, but this can be adjusted to suit analysis needs. A shorter timeframe makes the indicator more sensitive. A longer timeframe makes it less sensitive. Users can click the green arrow next to "advanced options" to add horizontal lines for custom overbought and oversold levels. Two lines can be added by separating the numbers with a comma (10,90). Suggested Scans MFI Oversold: This scan searches for stocks that are above \$20 per share, trade over 100,000 shares per day and have oversold Money Flow Index (<10). Consider this a starting point for further analysis and due diligence. MFI Overbought: This scan searches for stocks that are above \$20 per share, trade over 100,000 shares per day and have overbought Money Flow Index (>90). Consider this a starting point for further analysis and due diligence. Further Study New Concepts in Technical Trading Systems Technical Analysis for the Trading Professional Welles Wilder Constance Brownstockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi 7/8
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » On Balance Volume (OBV) On Balance Volume (OBV) Introduction On Balance Volume (OBV) measures buying and selling pressure Advertisement as a cumulative indicator that adds volume on up days and subtracts volume on down days. OBV was developed by Joe Granville and introduced in his 1963 book, Granvilles New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow. Chartists can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends. Calculation The On Balance Volume (OBV) line is simply a running total of positive and negative volume. A periods volume is positive when the close is above the prior close. A periods volume is negative when the close is below the prior close. I tecoigpiei aoetepircoepiete: f h lsn rc s bv h ro ls rc hn CretOV=Peiu OV+CretVlm urn B rvos B urn oue I tecoigpiei blwtepircoepiete: f h lsn rc s eo h ro ls rc hn CretOV=Peiu OV - CretVlm urn B rvos B urn oue I tecoigpie eul tepircoepiete: f h lsn rcs qas h ro ls rc hn CretOV=Peiu OV(ocag) urn B rvos B n hnestockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 1/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com Data in the table above comes from Wal-mart (WMT). Volume figure were rounded off and are shown in 1000s. In other words, 8,200 really equals 8,200,000 or 8.2 million shares. First, we must determine if Wal-mart closed up (+1) or down (-1). This number is now used as the volume multiplier to compute positive or negative volume. The last column (OBV) forms the running total for positive/negative volume. Because OBV has to start somewhere, the first value (8200) is simply equal to first periods positive/negative volume. The chart below shows Wal-mart with volume and OBV.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 2/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com Interpretation Granville theorized that volume precedes price. OBV rises when volume on up days outpaces volume on down days. OBV falls when volume on down days is stronger. A rising OBV reflects positive volume pressure that can lead to higher prices. Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices. Granville noted in his research that OBV would often move before price. Expect prices to move higher if OBV is rising while prices are either flat or moving down. Expect prices to move lower if OBV is falling while prices are either flat or moving up. The absolute value of OBV is not important. Chartists should instead focus on the characteristics of the OBV line. First define the trend for OBV. Second, determine if the current trend matches the trend for the underlying security. Third, look for potential support or resistance levels. Once broken, the trend for OBV will change and these breaks can be used to generate signals. Also notice that OBV is based on closing prices. Therefore, closing prices should be considered when looking for divergences or support/resistance breaks. And finally, volume spikes can sometimes throw off the indicator by causing a sharp move that will require a settling period. Divergences Bullish and bearish divergence signals can be used to anticipate a trend reversal. These signals are truly based on the theory that volume precedes prices. A bullish divergence forms when OBV moves higher or forms a higher low even as prices move lower or forge a lower low. A bearish divergence forms when OBV moves lower or forms a lower low even as prices move higher or forge a higher high. The divergence between OBV and price should alert chartists that a price reversal could be in the making.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 3/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com The chart for Starbucks (SBUX) shows a bullish divergence forming in July. On the price chart, SBUX moved below its June low with a lower low in early July. OBV, on the other hand, held above its June low to form a bullish divergence. OBV went on to break resistance before SBUX broke resistance. This was a classic case of volume leading price. SBUX broke resistance a week later and continued above 20 for a 30+ percent gain. The second chart shows OBV moving higher as Texas Instruments (TXN) trades within a range. Rising OBV during a trading range indicates accumulation, which is bullish.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 4/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com The chart for Medtronic (MDT) shows a bearish divergence with volume leading price lower. The blue dotted lines identify the divergence period. MDT moved higher (43 to 45) as OBV moved lower. Also notice that OBV broke support during this divergence period. The uptrend in OBV reversed with the break below the February low. MDT, on the other hand, was still moving higher. Volume ultimately won the day as MDT followed volume lower with a decline into the low 30s. The second chart shows Valero Energy (VLO) with OBV forming a bearish divergence in April and a confirming support break in May.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 5/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.comstockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 6/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com Trend Confirmation OBV can be used to confirm a price trend, upside breakout or downside break. The chart for Best Buy (BBY) shows three confirming signals as well as confirmation of the price trend. OBV and BBY moved lower in December-January, higher from March to April, lower from May to August and higher from September to October. The trends in OBV matched the trend in BBY.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 7/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com OBV also confirmed trend reversals in BBY. Notice how BBY broke its down trendline in late February and OBV confirmed with a resistance breakout in March. BBY broke its up trendline in late April and OBV confirmed with a support break in early May. BBY broke its down trendline in early September and OBV confirmed with a trendline break a week later. These coincident signals indicated that positive and negative volume were in harmony with price. Sometimes OBV moves step-for-step with the underlying security. In this case, OBV is confirming the strength of the underlying trend, be it down or up. The chart for Autozone (AZO) shows prices as a black line and OBV as a pink line. Both moved steadily higher from November 2009 until October 2010. Positive volume remained strong throughout the advance. Conclusionsstockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 8/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com On Balance Volume (OBV) is a simple indicator that uses volume and price to measure buying pressure and selling pressure. Buying pressure is evident when positive volume exceeds negative volume and the OBV line rises. Selling pressure is present when negative volume exceeds positive volume and the OBV line falls. Chartists can use OBV to confirm the underlying trend or look for divergences that may foreshadow a price change. As with all indicators, it is important to use OBV in conjunction with other aspects of technical analysis. It is not a stand alone indicator. OBV can be combined with basic pattern analysis or to confirm signals from momentum oscillators. SharpCharts On Balance Volume (OBV) is available in SharpCharts as an indicator. After selecting, OBV can be positioned above, below or behind the price of the underlying security. Positioning "behind price" makes it easy to compare OBV with the underlying security. Chartists can also add a moving average or another indicator to OBV by selecting "advanced options", which is to the right of the indicator position. Click here for a live chart with On Balance Volume. Suggested Scansstockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 9/10
• 6/2/12 On Balance Volume (OBV) - ChartSchool - StockCharts.com Bullish Divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bullish divergences are found by looking for stocks where price is BELOW the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are ABOVE the 65-day SMA and 20-day SMA. Bearish divergence in OBV and ADL: This scan starts with a base of stocks that are averaging at least \$10 in price and 100,000 daily volume over the last 60 days. Potential bearish divergences are found by looking for stocks where price is ABOVE the 65-day SMA and 20-day SMA, but OBV and the Accumulation Distribution Line are BELOW the 65-day SMA and 20-day SMA. Further Study This book covers it all with explanations that are simple and clear. Murphy covers all the major charts patterns and indicators, including OBV. A complete chapter is devoted to understanding volume and open interest. Technical Analysis of the Financial Markets John J. Murphy Send us your Feedback! Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:on_balance_volume_ob 10/10
• 6/2/12 Percentage Price Oscillator - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Percentage Price Oscillator Percentage Price Oscillator Introduction The Percentage Price Oscillator (PPO) is a momentum oscillator that measures the difference between two moving averages as a percentage of the larger moving average. As with its cousin, MACD, the Percentage Price Oscillator is shown with a signal line, a histogram and a centerline. Signals are generated with signal line crossovers, centerline crossovers and divergences. Because these signals are no different than those associated with MACD, this article will focus on a few differences between the two. First, PPO readings are not subject to the price level of the security. Second, PPO readings for different securities can be compared, even when there are large differences in the price. See the ChartSchool article on MACD for information on signals common to both MACD and PPO. Calculation Pretg PieOclao (P) {1-a EA-2-a EA/6dyEA x10 ecnae rc siltr PO: (2dy M 6dy M)2-a M} 0 Sga Ln:9dyEAo PO inl ie -a M f P POHsorm PO-Sga Ln P itga: P inl ie While MACD measures the absolute difference between two moving averages, PPO makes this a relative value by dividing difference by the slower moving average (26-day EMA). PPO is simply the MACD value divided by the longer moving average. The result is multiplied by 100 to move the decimal place two spots. The table below shows Intel (INTC) with values for the 12-day EMA, 26-day EMA, MACD and PPO. Intel is priced in the low 20s and MACD values range from -44 cents to +64 cents. PPO puts this in percentage terms with values ranging from -2.01 to +2.85. It is easier to compare levels over time with percentages. -2.01 is equivalent to -2.01%, while +2.85 is equivalent to +2.85%.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_oscillators_pp 1/8
• 6/2/12 Percentage Price Oscillator - ChartSchool - StockCharts.com Standard PPO is based on the 12-day Exponential Moving Average (EMA) and the 26-day EMA, but these parameters can be changed according to investor or trader preferences. Closing prices are used to calculate the moving averages so PPO signals should be measured against closing prices. A 9-day EMA of PPO is plotted as a signal line to identify upturns and downturns in the indicator. Interpretation As with MACD, the PPO reflects the convergence and divergence of two moving averages. PPO is positive when the shorter moving average is above the longer moving average. The indicator moves further into positive territory as the shorter moving average distances itself from the longer moving average. This reflects strong upside momentum. The PPO is negative when the shorter moving average is below the longer moving average. Negative readings grow when the shorter moving average distances itself from the longer moving average (goes further negative). This reflects strong downside momentum. The histogram represents the difference between PPO and its 9-day EMA, the signal line. The histogram is positive when PPO is above its 9-day EMA and negative when PPO is below its 9-day EMA. The PPO-Histogram can be used to anticipate signal line crossovers in the PPO. See the ChartSchool article on the MACD Histogram for signal details. MACD, PPO and Price MACD levels are affected by the price of a security. A high priced security will have higher or lower MACD values than a low priced security, even if volatility is basically equal. This is because MACD is based on the absolute difference in the two moving averages. Chart 2 shows Google with MACD and PPO for comparative purposes. The 12-day EMA is aroundstockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_oscillators_pp 3/8
• 6/2/12 Percentage Price Oscillator - ChartSchool - StockCharts.com 495, the 26-day EMA is around 512 and the difference is -17 (double digits). Notice that Googles MACD reached double digits on the upside and the downside, but the Percentage Price Oscillator ranged from +2.5 to -3.5. MACD values appear higher because Google is priced at a relatively high level. MACD for the Dow Industrials, which is above 10,000, hits triple digits on a regular basis. However, the PPO ranges from -2 to +2, which is a much more definable range. Although the indicator lines look the same, there are often subtle differences between MACD and PPO. In the Google example, notice how the PPO broke below the February low, but MACD has yet to break its February low. The lower low in the PPO shows expanding downside momentum. Large Price Changes Because MACD is based on absolute levels, large price changes can affect MACD levels over an extended period of time. If a stock advances from 20 to 100, its MACD levels will be considerably smaller around 20 than around 100. The PPO solves this problem by showing MACD values in percentage terms. Chart 3 shows Baidu (BIDU) advancing from 25 to 75 over a 12 month period. MACD values around 25-30 are going to be generally smaller than MACD values around 70-80. Notice that MACD broke above its July and March highs, but the PPO did not break these corresponding highs. Also note that Baidu becomes overbought when the PPO exceeds +5.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_oscillators_pp 4/8
• 6/2/12 Percentage Price Oscillator - ChartSchool - StockCharts.com Comparing Different Securities Because the Percentage Price Oscillator (PPO) is a percentage version of MACD, its values can be compared against other securities. Dell (DELL) and Hewlett Packard (HPQ) are in the same industry group, but their stock prices are at different levels. As of late May 2010, DELL was trading in the high teens and HPQ was trading in the mid 40s. The absolute price level has nothing to do with fundamentals, but it does affect the level of MACD. HPQ will no doubt have a higher MACD than DELL. However, we can apply the Percentage Price Oscillator (PPO) to compare momentum. First, notice that the PPO for DELL ranges from -4 to +4 for an 8 point range). The PPO for HPQ ranges from -3 to +2 for a range of 5. Right off the bat we can see that DELL is more volatile than HPQ because its PPO range is greater. Second, we can see that upside momentum for DELL was stronger than HPQ in March-April. The PPO for DELL advanced from negative territory and exceeded 4. The PPO for HPQ turned positive before the PPO for DELL, but did not exceed 1.6.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_oscillators_pp 5/8
• 6/2/12 Percentage Price Oscillator - ChartSchool - StockCharts.com Conclusions The Percentage Price Oscillator (PPO) generates the same signals at MACD, but provides an added dimension as a percentage version of MACD. The PPO levels of the Dow Industrials (price ~11000) can be compared against the PPOstockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_oscillators_pp 6/8
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Percentage Volume Oscillator Percentage Volume Oscillator Introduction The Percentage Volume Oscillator (PVO) is a momentum oscillator for volume. PVO measures the difference between two volume-based moving averages as a percentage of the larger moving average. As with MACD and the Percentage Price Oscillator (PPO), it is shown with a signal line, a histogram and a centerline. PVO is positive when the shorter volume EMA is above the longer volume EMA and negative when the shorter volume EMA is below. This indicator can be used to define the ups and downs for volume, which can then be use to confirm or refute other signals. Typically, a breakout or support break is validated when PVO is rising or positive. Calculation Pretg Vlm Oclao (V) ecnae oue siltr PO: (1-a EAo Vlm -2-a EAo Vlm)2-a EAo Vlm)x10 (2dy M f oue 6dy M f oue/6dy M f oue 0 Sga Ln:9dyEAo PO inl ie -a M f V POHsorm PO-Sga Ln V itga: V inl ie The default settings for the PVO are (12,26,9), which is the same as MACD or the PPO. This means PVO is positive when the 12-day Volume EMA moves above the 26-day Volume EMA. PVO is negative when the 12-day Volume EMA moves below the 26-day Volume EMA. The positive or negative degree depends on how far above or below. A PVO that equals 5 would indicate that the 12-day Volume EMA was 5% above the 26-day Volume EMA. A PVO that equals -3% would indicate that the 12-day Volume EMA was 3% less than the 26-day Volume EMA. The PVO-Histogram acts just like the MACD and PPO histograms. The PVO-Histogram is positive when the PVO is trading above its signal line (9-day EMA). The PVO-Histogram is negative when the PVO is below its signal line. Note that the PVO is multiplied by 100 to move the decimal point two places.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 1/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com Interpretation Generally speaking, volume is above average when the PVO is positive and below average when the PVO is negative. A negative and rising PVO indicates that volume levels are increasing. A positive and falling PVO indicates that volume levels are decreasing. Chartists can use this information to confirm or refute movements on the price chart. Even though PVO is based on a momentum oscillator formula, it is important to remember that moving averages lag. A 12- day EMA carries 12 days of volume data with data weighted more towards the newest data. A 26-day EMA lags even more because it contains 26 days of data. This means that the PVO(12,26,9) can sometimes be out of sync with price action. Validating Breaks The Percentage Volume Oscillator (PVO) can be used to confirm a support or resistance break. We have all heard that volume validates a price movement. A support break on increasing volume has more credibility than a support break on low volume. Similarly, a resistance break on expanding volume shows more buying interest and this increases the chances of success. The chart below shows Volero (VLO) with the PVO(12,26,9) confirming a pennant breakout. Volume declined in August as the PVO moved lower until mid September. The PVO then turned up, but did not move into positive territory until late October. This meant the 12-day Volume EMA finally crossed above the 26-day EMA and volume was increasing. VLO wasstockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 2/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com still stuck in the pennant on the first PVO cross, but broke pennant resistance with the second PVO cross. Volume confirmed the breakout and VLO continued its advance. The chart for Archer Daniels Midland (ADM) shows a support and resistance break confirmed by surges in the PVO. The stock broke resistance at the beginning of August as the PVO moved into positive territory with a sharp surge. Expanding volume on an upside breakout is bullish. After a three month run, the stock broke support with a gap and another surge in the PVO. Notice how the PVO surged to 20 both times. This meant that the 12-day Volume EMA was some 20% above the 26-day Volume EMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 3/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com Fine Tuning PVO Chartists can fine-tune the PVO to highlight volume surges for a specific period. There are around 250 trading days in a year. Therefore, a 250-day EMA would represent average annual volume with a weighting towards the most recent periods. Using this for the long EMA in the PVO, we can choose a short EMA to highlight volume surges that are above this average. A PVO(1,250) would be positive when 1-day volume was above the 250-day Volume EMA. A PVO(5,250) would be positive when the 5-day Volume EMA is above the 250-day EMA. The chart for Merck (MRK) shows volume bars with a 5-day EMA in blue and a 250-day EMA in red. The PVO(1,250) is shown in the first indicator window (green) and the PVO(5,250) is shown in the lower indicator window (black). The signal line is not shown because there is no parameter entered. PVO(5,250,9) would show the PVO with a 9-day EMA for the signal line.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 4/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com From the chart above, we can see that PVO(1,250) turned positive when a volume bar surged above the 250-day EMA (green arrows). The PVO(5,250) turned positive when the 5-day Volume EMA moved above the 250-day Volume EMA (blue arrows). As one might expect, PVO(1,250) crosses the zero line more often and is just a little bit quicker. Basically, volume is above average when PVO(1,250) is positive and below average when negative. A breakout on above average volume is more robust than one with below average volume. Same thing goes for a support break. Conclusions The Percentage Volume Oscillator (PVO) is a momentum indicator applied to volume. Volume doesnt trend so this oscillator can be quite choppy. Bullish and bearish divergences are not well suited for the PVO. Instead, chartists would be better off looking for signs of increasing volume with a move into positive territory and signs of decreasing volume with a move into negative territory. Increasing volume can validate a support or resistance break. Similarly, a surge or significant support break on low volume may be less robust. As with all technical indicators, it is important to use the Percentage Volume Oscillator (PVO) in conjunction with other aspects of technical analysis, such as chart patterns and momentum oscillators.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 5/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com PVO and SharpCharts PVO can be set as an indicator above, below or behind a securitys price plot. Once the indicator is chosen from the drop down list, the default parameters will appear (12,26,9). These parameters can be adjusted as shown in the example below. Click "advanced options" to add the moving average or a horizontal line to an indicator. In the example below, volume was added as an indictor twice in order to show two moving averages. The second volume indicator was placed behind the first volume indicator (behind ind) and the EMA was set at 250 with the advanced options. Click here for a live example of the PVO. Suggested Scans PPO Bullish Cross with PVO Positive: This scan reveals stocks where the PPO (12,26,9) moved above the PPO Signal Line and the PVO(12,26,9) moved into positive territory to show increasing volume. This scan is just meant as a starter for further refinement.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 6/7
• 6/2/12 Percentage Volume Oscillator - ChartSchool - StockCharts.com PPO Bearish Cross with PVO Positive : This scan reveals stocks where the PPO (12,26,9) moved below the PPO Signal Line and the PVO(12,26,9) moved into positive territory to show increasing volume. This scan is just meant as a starter for further refinement. Further Study John Murphys book covers all the bases for technical analysis with sections explaining volume, open interest and volume indicators. Murphy discusses the importance of volume and shows many chart examples. Introduction to Technical Analysis is a workbook that comes with a CD-Rom that includes over 7 hours of audio-visual presentation. Pring shows how to apply, analyze and interpret charts along with volume. Technical Analysis of the Financial Markets Introduction to Technical Analysis John J. Murphy Martin Pring Send us your feedback! Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:percentage_volume_os 7/7
• 6/2/12 Price Relative - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Price Relative Price Relative Introduction The Price Relative compares the performance of one security to Advertisement another with a ratio chart. This indicator is also known as the Relative Strength Comparative. Often, the Price Relative is used to compare the performance of a stock against a benchmark index, such as the S&P 500. Chartists can also use the Price Relative to compare the performance of a stock to its sector or industry group. This makes it possible to determine if a stock is leading or lagging its peers. The Price Relative can also be used to find stocks that are holding up better during a broad market decline or showing weakness during a broad market advance. Note: A ratio ticker symbol is used to create a Price Relative chart. A ratio symbol consists of two ticker symbols joined together with a colon character (e.g., "IBM:\$SPX", "\$INDU:\$GOLD"). The value of a ratio ticker symbol is equal to the close of the first symbol divided by the close of the second symbol. Calculation PieRltv =Bs Scrt /CmaaieScrt rc eaie ae euiy oprtv euiy The Price Relative is simply the base security divided by the comparative security. Typically, the underlying security is a stock and the benchmark is the S&P 500. For example, chartists can use the Price Relative to show the performance of Starbucks (SBUX) relative to the S&P 500 (\$SPX). This would simply be the price of Starbucks divided by the S&P 500. Starbucks is part of the consumer discretionary sector. Chartists could also view the performance of Starbucks relative to the Consumer Discretionary SPDR (XLY) with the appropriate Price Relative (SBUX:XLY). Chartists could also view sector performance relative to the S&P 500 (XLY:\$SPX).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 1/8
• 6/2/12 Price Relative - ChartSchool - StockCharts.com Click here to download this spreadsheet example. The table above shows the Starbucks/S&P 500 Price Relative. The first value in row two is .0256 (30.66/1197.75). This ratio increases when Starbucks advances more than the S&P 500 or declines less than the S&P 500. This ratio decreases when Starbucks advances less than the S&P 500 or declines more than the S&P 500. For reference, the table also shows the percentage change in Starbucks and the S&P 500. The percentage change in Starbucks less the percentage change in the S&P 500 is also equal to the daily changes in the Price Relative. In row two, notice that Starbucks was down 2.66% and the S&P 500 was down 1.62%. The Price Relative moved lower (-1.04%) because Starbucks declined more than the S&P 500. Row three shows the Price Relative rising because Starbucks (+.50%) was up more than the S&P 500 (+.02%). The chart below shows the Price Relative in action.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 2/8
• 6/2/12 Price Relative - ChartSchool - StockCharts.com Interpretation The Price Relative is used to gauge relative strength, which is important when it comes to stock selection. Many portfolio managers compare their performance to a benchmark, such as the S&P 500. Their goal is to outperform that benchmark. In order to achieve this goal, managers often look for stocks that are showing relative strength. Enter the Price Relative. The Price Relative rises when a stock shows relative strength and is outperforming its benchmark. Conversely, the Price Relative falls when a stock shows relative weakness and is underperforming its benchmark. There are a few ways to use the Price Relative. First, chartists can perform simple trend analysis to determine the direction of the Price Relative. This can be based on the actual trend, support/resistance breaks, moving averages or other indicators. Second, chartists can look for bullish and bearish divergences in relative strength to warn of a potential reversal in the stock price. Trend Identification Chartists can apply basic trend analysis or moving averagesto determine the direction of the Price Relative. As with any price chart, the Price Relative is trending up when higher highs and higher lows form. Conversely, the Price Relative is trending down when lower lows and lower highs form. Chartists can also apply a moving average of choice. A long-term downtrend could be present when the Price Relative is trading below its 150-day SMA. Alternatively, a long-term uptrend could be present when the Price Relative is trading above its 150-day SMA.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 3/8
• 6/2/12 Price Relative - ChartSchool - StockCharts.com The chart above shows Hewlett-Packard (HPQ) with the Price Relative (HPQ:\$SPX). A 15-day SMA was applied to both the HPQ price and the Price Relative. First, notice that the Price Relative broke resistance in mid June to signal the start of an uptrend. Outperformance continued into December as the Price Relative traced out higher highs and higher lows. The Price Relative peaked in late December and formed a lower high in late February. The subsequent break below the 150-day SMA signaled the start of a downtrend and a period of underperformance. Bullish/Bearish Divergences A bullish divergence in the Price Relative signals relative strength during a price decline. Stocks that hold up the best during a decline are often the leaders when the market turns around. The chart below shows Dupont (DD) with the Price Relative (DD:\$SPX). Even though the stock declined from late April until early July, the Price Relative moved higher to signal relative strength during this decline. Dupont was holding up better than the overall market. The stock subsequently became a leader when the market reversed and started moving higher in July. Notice that the Price Relative and the stock both broke resistance in late July (blue lines).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 4/8
• 6/2/12 Price Relative - ChartSchool - StockCharts.com A bearish divergence in the Price Relative signals relative weakness during a price advance. Stocks that underperform on the way up often lead lower when the market reverses. The chart below shows Mastercard (MA) with the Price Relative (MA:\$SPX). After a sharp decline in early February, the stock advanced to a new reaction high in late April. The Price Relative did not confirm and formed a significantly lower high for a bearish divergence. Also notice that Price Relative was flat when the stock advanced from the second week of March until late April (blue lines). These signs of relative weakness on the way up foreshadowed a sharp decline in May.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 5/8
• 6/2/12 Price Relative - ChartSchool - StockCharts.com Further Study Murphys book covers relative strength analysis in the chapter on intermarket analysis. Murphy also looks at sector relative strength and shows how to apply relative strength to individual stocks. Technical Analysis Explained features a chapter on the concept of relative strength. Pring shows chart examples to determine relative strength and also teaches readers how to combine relative strength with other indicators. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pringstockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative 7/8
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com The table above shows the 12-day Rate-of-Change calculations for the Dow Industrials in May 2010. The yellow cells show the Rate-of-Change from April 28th to May 14th. It is actually 13 trading days, but the close on the 28th acts as the starting point on the 29th. The blue cells show the 12-day Rate-of-Change from May 7th until May 25th. Interpretation As noted above, the Rate-of-Change indicator is momentum in its purest form. It measures the percentage increase or decrease in price over a given period of time. Think of its as the rise (price change) over the run (time). In general, prices are rising as long as the Rate-of-Change remains positive. Conversely, prices are falling when the Rate-of-Change is negative. ROC expands into positive territory as an advance accelerates. ROC dives deeper into negative territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. The sky is the limit for an advance. There is, however, a downside limit. Securities can only decline 100%, which would be to zero. Even with these lopsided boundaries, Rate-of-Change produces identifiable extremes that signal overbought and oversold conditions. Trend Identification Even though momentum oscillators are best suited for trading ranges or zigzag trends, they can also be used to define the overall direction of the underlying trend. There are approximately 250 trading days in a year. This can be broken down into 125 days per half year, 63 days per quarter and 21 days per month. A trend reversal starts with the shortest timeframe and gradually spreads to the other timeframes. In general, the long-term trend is up when both the 250-day and 125-day Rate- of-Change are positive. This means that prices are higher now than they were 12 and 6 months ago. Long positions taken 6 or 12 months ago would be profitable and buyers would be happy.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 2/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com Chart 2 shows IBM with the 250-day, 125-day, 63-day and 21-day Rate-of-Change. There have been three big trends in the last three years. The first was up as the 250-day Rate-of-Change was largely positive until September 2008 (1). The second was down as the indicator turned negative from October 2008 until September 2009 (2). The third is up as the indicator turned positive in late September 2009 (3). Even though the big uptrend remains in force, IBM flattened out on the price chart and this affected the 125-day and 63-day Rate-of-Change. The 63-day Rate-of-Change (quarterly) has been flirting with negative territory since February (4). The 125-day Rate-of-Change (six month) dipped into negative territory for the first time since April 2009 (5). This shows some deterioration in IBM that serves as an alert to watch the stock carefully. A break below the six month trading range would be a bearish development (6). Overbought/Oversold Extremesstockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 3/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com There are basically three price movements: up, down and sideways. Momentum oscillators are ideally suited for sideways price action with regular fluctuations. This makes it easier to identify extremes and forecast turning points. Security prices can also fluctuate when trending. For example, an uptrend consists of a series of higher highs and higher lows as prices zigzag higher. Pullbacks often occur at regular intervals based on the percentage move, time elapsed or both. A downtrend consists of lower lows and lower highs as prices zigzag lower. Counter trend advances retrace a portion of the prior decline and usually peak below the prior high. Peaks can occur at regular intervals based on the percentage move, time elapsed or both. The Rate-of-Change can be used to identify periods when the percentage change nears a level that foreshadowed a turning point in the past. Chart 3 shows Aetna (AET) with an uptrend from April 2009 until April 2010. Notice how the stock zigzagged up with a series of higher highs and higher lows. Because the overall trend was up, the Rate-of-Change indicator was used to identify short-term oversold levels as a chance to partake in the bigger uptrend. Short-term overbought signals were ignored because the bigger trend was up. Based on the May-June bounces, -10% was set as the oversold boundary. Movements below this level indicated that prices were at a short-term extreme. Overbought and oversold settings depend on the volatility of the underlying security. A more volatile stock may use -15% for oversold, while a less volatile stock may use -5%. Oversold readings serve as an alert to be ready for a turning point. Prices are oversold, but have yet to actually turn. Remember, a security can become oversold and remain oversold as the decline continues. A 20-day moving average was overlaid to identify an actual upturn. After ROC became oversold in early October, AET moved above its 20-day SMA in late October to confirm an upturn (1). The second oversold reading occurred in early February and AET moved above its 20-day SMA in late February (2).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 4/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com Chart 4 shows Microsoft (MSFT) in a downtrend from November 2007 until March 2009. This example uses a 20-day Rate- of-Change to identify oversold levels within a bigger downtrend. The number of time periods depends on the individual security and the desired trading timeframe. The late December high occurred with an overbought reading above +10%. This means Microsoft was up over 10% in a 20-day period, which is about a month. Thats a pretty good bounce within a bigger downtrend. The next overbought reading did not occur until April when the Rate-of-Change again exceeded +10%. MSFT broke trendline support in May to signal a continuation of the downtrend. The next overbought reading occurred in early August 2008. It took a while, but the stock eventually broke support at 24 in mid September and again in early October.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 5/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com Chart 5 shows Abercrombie & Fitch (ANF) within a trading range from October 2006 to February 2008. The 20-day Rate-of- Change indicator sets overbought at +10% and oversold at -10%. The overbought and oversold levels identify extremes quite well, but timing the actual turn is more difficult because of the volatility. The next chart reduces this volatility by using a exponential moving average in place of the price plot.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 6/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com Chart 6 shows ANF as a 10-day EMA (black) and the actual price plot is invisible. A 30-day EMA has been overlaid as a signal line. Furthermore, the 20-day Rate-of-Change is shown with a 5-day SMA to smooth out the fluctuations. There are fewer overbought and oversold readings using the 5-day SMA. Focusing only on the buy signals, the green dotted line shows when ROC exceeds -10% and the green arrow shows when the 10-day EMA crosses above the 30-day SMA. The oversold readings are usually early, but the moving average crossovers are usually late. Such is life with technical analysis. The point here is to reduce whipsaws by smoothing the data. A 10-day EMA was used because it is faster than a 10-day SMA. A 30-day SMA was used because it is slower than a 30-day EMA. Speeding up the shorter moving average and slowing down the longer moving average makes for slightly quicker signals. Conclusions The Rate-of-Change oscillator measures the speed at which prices are changing. An upward surge in the Rate-of-Change reflects a sharp price advance. A downward plunge indicates a steep price decline. Even though chartists can look for bullish and bearish divergences, these formations can be misleading because of sharp moves. Sustained advances often start with a big surge out of the gate. Subsequent advances are usually less sharp and this causes a bearish divergence to form in the Rate-of-Change oscillator. It is important to remember that prices are constantly increasing as long as the Rate-of-Change remains positive. Positive readings may be less than before, but a positive Rate-of-Change still reflects a price increase, not a price decline. Like all technical indicator, the Rate-of-Change oscillator should be used in conjunction with other aspects of technical analysis.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 7/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com ROC and SharpCharts Rate-of-Change can be set as an indicator above, below or behind a securitys price plot. Once the indicator is chosen from the drop down list, the default parameter setting appears (12). This parameter can be adjusted to increase or decrease sensitivity. Users can add a moving average by clicking "advanced options" and choosing an overlay. A moving average can be used as a signal line or to simply smooth the data. Horizontal lines can also be added to mark overbought or oversold levels. Click here for a live example of Rate-of-Change. Suggested Scans Oversold Rate-of-Change: This scan reveals stocks with a positive 125-day Rate-of-Change and an oversold 21-day Rate- of-Change (below -8%). Once these criteria are met, a bullish signal is triggered when the stock closes above the 20-day SMA. Overbought Rate-of-Change: This scan reveals stocks with a negative 125-day Rate-of-Change and an overbought 21-day Rate-of-Change (above 8%). Once these criteria are met, a bearish signal is triggered when the stock closes below the 20- day SMA. Further Study Technical Analysis of the Financial Markets has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to Rate-of-Change. Prings book shows the basics ofstockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 8/9
• 6/2/12 Rate of Change (ROC) - ChartSchool - StockCharts.com momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pring Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a 9/9
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Relative Strength Index (RSI) Relative Strength Index (RSI) Introduction Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend. RSI is an extremely popular momentum indicator that has been featured in a number of articles, interviews and books over the years. In particular, Constance Browns book, Technical Analysis for the Trading Professional, features the concept of bull market and bear market ranges for RSI. Andrew Cardwell, Browns RSI mentor, introduced positive and negative reversals for RSI. In addition, Cardwell turned the notion of divergence, literally and figuratively, on its head. Wilder features RSI in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, Average True Range and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilders indicators have stood the test of time and remain extremely popular. Calculation 10 0 RI=10----- S 0 ---- 1+RS R =AeaeGi /AeaeLs S vrg an vrg os To simplify the calculation explanation, RSI has been broken down into its basic components: RS, Average Gain and Average Loss. This RSI calculation is based on 14 periods, which is the default suggested by Wilder in his book. Losses are expressed as positive values, not negative values. The very first calculations for average gain and average loss are simple 14 period averages. First Average Gain = Sum of Gains over the past 14 periods / 14. First Average Loss = Sum of Losses over the past 14 periods / 14 The second, and subsequent, calculations are based on the prior averages and the current gain loss: Average Gain = [(previous Average Gain) x 13 + current Gain] / 14. Average Loss = [(previous Average Loss) x 13 + current Loss] / 14. Taking the prior value plus the current value is a smoothing technique similar to that used in exponential moving average calculation. This also means that RSI values become more accurate as the calculation period extends. SharpCharts uses at least 250 data points prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To exactly replicate our RSI numbers, a formula will need at least 250 data points. Wilders formula normalizes RS and turns it into an oscillator that fluctuates between zero and 100. In fact, a plot of RS looks exactly the same as a plot of RSI. The normalization step makes it easier to identify extremes because RSI is range bound. RSI is 0 when the Average Gain equals zero. Assuming a 14-period RSI, a zero RSI value means prices movedstockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 1/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com lower all 14 periods. There were no gains to measure. RSI is 100 when the Average Loss equals zero. This means prices moved higher all 14 periods. There were no losses to measure.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 2/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Like many momentum oscillators, overbought and oversold readings for RSI work best when prices move sideways within a range. Chart 4 shows MEMC Electronics (WFR) trading between 13.5 and 21 from April to September 2009. The stock peaked soon after RSI reached 70 and bottomed soon after the stock reached 30.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 4/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Divergences According to Wilder, divergences signal a potential reversal point because directional momentum does not confirm price. A bullish divergence occurs when the underlying security makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this shows strengthening momentum. A bearish divergence forms when the security records a higher high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening momentum. Chart 5 shows Ebay (EBAY) with a bearish divergence in August-October. The stock moved to new highs in September-October, but RSI formed lower highs for the bearish divergence. The subsequent breakdown in mid October confirmed weakening momentum. A bullish divergence formed in January-March. The bullish divergence formed with Ebay moving to new lows in March and RSI holding above its prior low. RSI reflected less downside momentum during the February-March decline. The mid March breakout confirmed improving momentum. Divergences tend to be more robust when they form after an overbought or oversold reading. Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend - and yet the downtrend continues. Chart 6 shows the S&P 500 ETF (SPY) with three bearish divergences and a continuing uptrend. These bearish divergences may have warned of a short- term pullback, but there was clearly no major trend reversal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 5/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Failure Swings Wilder also considered failure swings as strong indications of an impending reversal. Failure swings are independent of price action. In other words, failure swings focus solely on RSI for signals and ignore the concept of divergences. A bullish failure swing forms when RSI moves below 30 (oversold), bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a move to oversold levels and then a higher low above oversold levels. Chart 7 shows Research in Motion (RIMM) with 10-day RSI forming a bullish failure swing.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 6/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70 and then breaks its prior low. It is basically a move to overbought levels and then a lower high below overbought levels. Chart 8 shows Texas Instruments (TXN) with a bearish failure swing in May-June 2008.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 7/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Trend ID In Technical Analysis for the Trading Professional, Constance Brown suggests that oscillators do not travel between 0 and 100. This also happens to be the name of the first chapter. Brown identifies a bull market range and a bear market for RSI. RSI tends to fluctuate between 40 and 90 in a bull market (uptrend) with the 40-50 zones acting as support. These ranges may vary depending on RSI parameters, strength of trend and volatility of the underlying security. Chart 9 shows 14-week RSI for SPY during the bull market from 2003 until 2007. RSI surged above 70 in late 2003 and then moved into its bull market range (40-90). There was one overshoot below 40 in July 2004, but RSI held the 40-50 zone at least five times from January 2005 until October 2007 (green arrows). In fact, notice that pullbacks to this zone provided low risk entry points to participate in the uptrend. On the flip side, RSI tends to fluctuate between 10 and 60 in a bear market (downtrend) with the 50-60 zone acting as resistance. Chart 10 shows 14-day RSI for the US Dollar Index (\$USD) during its 2009 downtrend. RSI moved to 30 in March to signal the start of a bear range. The 40-50 zone subsequently marked resistance until a breakout in December.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 8/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Positive-Negative Reversals Andrew Cardwell developed positive and negative reversals for RSI, which are the opposite of bearish and bullish divergences. Cardwells books are out of print, but he does offer seminars detailing these methods. Constance Brown credits Andrew Cardwell for her RSI enlightenment. Before discussing the reversal technique, it should be noted that Cardwells interpretation of divergences differs from Wilder. Cardwell considered bearish divergences as bull market phenomenon. In other words, bearish divergences are more likely to form in uptrends. Similarly, bullish divergences are considered bear market phenomenon indicative of a downtrend. A positive reversal forms when RSI forges a lower low and the security forms a higher low. This lower low is not at oversold levels, but usually somewhere between 30 and 50. Chart 11 shows MMM with a positive reversal forming in June 2009. MMM broke resistance a few weeks later and RSI moved above 70. Despite weaker momentum with a lower low in RSI, MMM held above its prior low and showed underlying strength. In essence, price action overruled momentum.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 9/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com A negative reversal is the opposite of a positive reversal. RSI forms a higher high, but the security forms a lower high. Again, the higher high is usually just below overbought levels in the 50-70 area. Chart 12 shows Starbucks (SBUX) forming a lower high as RSI forms a higher high. Even though RSI forged a new high and momentum was strong, the price action failed to confirm as lower high formed. This negative reversal foreshadowed the big support break in late June and sharp decline. Conclusions RSI is a versatile momentum oscillator that has stood the test of time. Despite changes in volatility and the markets over the years, RSI remains as relevant now as it was in Wilders days. While Wilders original interpretations are useful to understanding the indicator, the work of Brown and Cardwell takes RSI interpretation to a new level. Adjusting to this level takes some rethinking on the part of the traditionally schooled chartists. Wilder considers overbought conditions ripe for a reversal, but overbought can also be a sign of strength. Bearish divergences still produce some good sell signals, but chartists must be careful in strong trends when bearish divergences are actually normal. Even though the concept of positive and negative reversals may seem to undermine Wilders interpretation, the logic makes sense and Wilder would hardly dismiss the value of putting more emphasis on price action. Positive and negative reversals put price action of the underlying security first and the indicator second, which is the way it should be. Bearish and bullish divergences place the indicator first and price action second. By putting more emphasis on price action, the concept of positive and negative reversals challenges our thinking towards momentum oscillators. Using with SharpCharts RSI is available as an indicator for SharpCharts. Once selected, users can place the indicator above, below or behind the underlying price plot. Placing RSI directly on top of the price plot accentuates the movements relative to price action of the underlying security. Users can apply "advanced options" to smooth the indicator with a moving average or add a horizontal line to mark overbought or oversold levels.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 10/11
• 6/2/12 Relative Strength Index (RSI) - ChartSchool - StockCharts.com Suggested Scans ERSI Oversold in Uptrend: This scan reveals stocks that are in an uptrend with oversold RSI. First, stocks must be above their 200-day moving average to be in an overall uptrend. Second, RSI must cross below 30 to become oversold. RSI Overbought in Downtrend: This scan reveals stocks that are in a downtrend with overbought RSI turning down. First, stocks must be below their 200-day moving average to be in an overall downtrend. Second, CCI must cross above 70 to become overbought. Further Study New Concepts in Technical Trading Systems features a chapter on RSI that discloses the formula and five things RSI can tell us. Constance Browns book takes RSI to a new level with bull market and bear market ranges, positive and negative reversals, and projections based on RSI. Some methods of Andrew Cardwell, her RSI mentor, are also explained and refined in the book. New Concepts in Technical Trading Systems Technical Analysis for the Trading Professional Welles Wilder Constance Brown Send us your Feedback! Advertisement: Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:relative_strength_in 11/11
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » Stochastic Oscillator Stochastic Oscillator Introduction Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesnt follow price, it doesnt follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels. Calculation % =(urn Coe-Lws Lw/HgetHg -Lws Lw *10 K Cret ls oet o)(ihs ih oet o) 0 % =3dySAo % D -a M f K Lws Lw=lws lwfrtelo-akpro oet o oet o o h okbc eid HgetHg =hgethg frtelo-akpro ihs ih ihs ih o h okbc eid % i mlile b 10t mv tedcmlpittopae K s utpid y 0 o oe h eia on w lcs The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving average of %K. This line is plotted alongside %K to act as a signal or trigger line.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 1/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Interpretation The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%. Multiply this number by 100 to find %K %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range. The Stochastic Oscillator equals 15 when the close was near the bottom of the range. The close equals 57 when the close was in the middle of the range. Fast, Slow or Full There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lanes original formulas for %K and %D. %K in the fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell". Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic Oscillator (chart 2).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 3/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Fast Stochastic Oscillator: Fast %K = %K basic calculation Fast %D = 3-period SMA of Fast %K Slow Stochastic Oscillator: Slow %K = Fast %K smoothed with 3-period SMA Slow %D = 3-period SMA of Slow %K The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator. Users can set the look- back period, the number of periods to slow %K and the number of periods for the %D moving average. The default parameters were used in these examples: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3). Full Stochastic Oscillator: Full %K = Fast %K smoothed with X-period SMA Full %D = X-period SMA of Full %Kstockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 4/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com early November. Subsequent moves back above 20 signaled an upturn in prices (green dotted line) and continuation of the bigger uptrend. Chart 5 shows Autozone (AZO) with a support break in May 2009 that started a downtrend. With a downtrend in force, the Full Stochastic Oscillator (10,3,3) was used to identify overbought readings to foreshadow a potential reversal. Oversold readings were ignored because of the bigger downtrend. The shorter look-back period (10 versus 14) increases the sensitivity of the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator (20,5,5) is also shown. Notice that this less sensitive version did not become overbought in August, September and October. It is sometimes necessary to increase sensitivity to generate signals.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 6/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Bull Bear Divergences Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator. A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a higher low. This shows less downside momentum that could foreshadow a bullish reversal. A bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a lower high. This shows less upside momentum that could foreshadow a bearish reversal. Once a divergence takes hold, chartists should look for a confirmation to signal an actual reversal. A bearish divergence can be confirmed with a support break on the price chart or a Stochastic Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a resistance break on the price chart or a Stochastic Oscillator break above 50. 50 is an important level to watch. The Stochastic Oscillator moves between zero and one hundred, which makes 50 the centerline. Think of it as the 50 yard line in football. The offense has a higher chance of scoring when it crosses the 50 yard line. The defense has an edge as long as it prevents the offense from crossing the 50 yard line. A Stochastic Oscillator cross above 50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below 50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty. Chart 6 shows International Gaming Tech (IGT) with a bullish divergence in February-March 2010. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher low. There are three steps to confirming this higher low. The first is a signal line cross and/or move back above 20. A signal line cross occurs when %K (black) crosses %D (red). This provides the earliest entry possible. The second is a move above 50, which puts prices in the upper half of the Stochastic range. The third is a resistance breakout on the price chart. Notice how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late May.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 7/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Chart 7 shows Kohls (KSS) with a bearish divergence in April 2010. The stock moved to higher highs in early and late April, but the Stochastic Oscillator peaked in late March and formed lower highs. The signal line crosses and moves below 80 did not provide good early signals in this case because KSS kept moving higher. The Stochastic Oscillator moved below 50 for the second signal and the stock broke support for the third signal. As KSS shows, early signals are not always clean and simple. Signal line crosses, moves below 80 and moves above 20 are frequent and prone to whipsaw. Even after KSS broke support and the Stochastic Oscillator moved below 50, the stock bounced back above 57 and the Stochastic Oscillator bounced back above 50 before the stock continued sharply lower.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 8/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Bull Bear Set-ups George Lane identified another form of divergence to predict bottoms or tops. A bull set-up is basically the inverse of a bullish divergence. The underlying security forms a lower high, but the Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high, the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next decline is then expected to result in a tradable bottom. Chart 8 shows Network Appliance (NTAP) with a bull set-up in June 2009. The stock formed a lower high as the Stochastic Oscillator forged a higher high. This higher high shows strength in upside momentum. Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near future. NTAP declined below its June low and the Stochastic Oscillator moved below 20 to become oversold. Traders could have acted when the Stochastic Oscillator moved above its signal line, above 20 or above 50. Alternatively, NTAP subsequently broke resistance with a strong move.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 9/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a lower low. Even though the stock held above its prior low, the lower low in the Stochastic Oscillator shows increasing downside momentum. The next advance is expected to result in an important peak. Chart 9 shows Motorola (MOT) with a bear set-up in November 2009. The stock formed a higher low in late-November and early December, but the Stochastic Oscillator formed a lower low with a move below 20. This showed strong downside momentum. The subsequent bounce did not last long as the stock quickly peaked. Notice that the Stochastic Oscillator did not make it back above 80 and turned down below its signal line in mid December. Conclusions While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend. The indicator can also be used to identify turns near support or resistance. Should a security trade near support with an oversold Stochastic Oscillator, look for a break above 20 to signal an upturn and successful support test. Conversely, should a security trade near resistance with an overbought Stochastic Oscillator, look for a break below 80 to signal a downturn and resistance failure. The settings on the Stochastic Oscillator depend on personal preferences, trading style and timeframe. A shorter look- back period will produce a choppy oscillator with many overbought and oversold readings. A longer look-back period will provide a smoother oscillator with fewer overbought and oversold readings. Like all technical indicators, it is important to use the Stochastic Oscillator in conjunction with other technical analysis tools. Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 10/12
• 6/2/12 Stochastic Oscillator - ChartSchool - StockCharts.com Using with SharpCharts As noted above, there are three versions of the Stochastic Oscillator available as an indicator on SharpCharts. The default settings are as follows: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3). The look-back period (14) is used for the basic %K calculation. Remember, %K in the Fast Stochastic Oscillator is unsmoothed and %K in the Slow Stochastic Oscillator is smoothed with a 3-day SMA. The "3" in the Fast and Slow Stochastic Oscillator settings (14,3) sets the moving average period for %D. Chartists looking for maximum flexibility can simply choose the Full Stochastic Oscillator to set the look-back period, the smoothing factor for %K and the moving average for %D. The indicator can be placed above, below or behind the actual price plot. Placing the Stochastic Oscillator behind the price allows users to easily match indicator swings with price swings. Click here for a live example. Suggested Scans Stochastic Oscillator Oversold Upturn: This scan starts with stocks that are trading above their 200-day moving average to focus on those in a bigger uptrend. Of these, the scan then looks for stocks with a Stochastic Oscillator that turned up from an oversold level (below 20). Stochastic Oscillator Overbought Downturn: This scan starts with stocks that are trading below their 200-day moving average to focus on those in a bigger downtrend. Of these, the scan then looks for stocks with a Stochastic Oscillator that turned down after an overbought reading (above 80). Further Study Murphys book has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to the Stochastic Oscillator. Prings book shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pring Send us your feedback! Advertisement:stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochastic_oscillato 11/12
• 6/2/12 StochRSI - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » StochRSI StochRSI Introduction Developed by Tushard Chande and Stanley Kroll, StochRSI is an oscillator that measures the level of RSI relative to its high-low range over a set time period. StochRSI applies the Stochastics formula to RSI values, instead of price values. This makes it an indicator of an indicator. The result is an oscillator that fluctuates between 0 and 1. In their 1994 book, The New Technical Trader, Chande and Kroll explain that RSI can oscillate between 80 and 20 for extended periods without reaching extreme levels. Notice that 80 and 20 are used for overbought and oversold instead of the more traditional 70 and 30. Traders looking to enter a stock based on an overbought or oversold reading in RSI might find themselves continuously on the sidelines. Chande and Kroll developed StochRSI to increase sensitivity and generate more overbought/oversold signals. Calculation SohS =(S -Lws LwRI /(ihs Hg RI-Lws LwRI tcRI RI oet o S) Hget ih S oet o S) StochRSI measures the value of RSI relative to its high/low range over a set number of periods. The number of periods used to calculate StochRSI is transferred to RSI in the formula. For example, 14-day StochRSI would use the current value of 14-day RSI and the 14-day high-low range for 14-day RSI. 14-day StochRSI equals 0 when RSI is at its lowest point for 14 days. 14-day StochRSI equals 1 when RSI is at its highest point for 14 days. 14-day StochRSI equals .5 when RSI is in the middle of its 14 day high-low range. 14-day StochRSI equals .2 when RSI is near the low of its 14 day high-low range. 14-day StochRSI equals .80 when RSI is near the high of its 14 day high-low range.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 1/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com Click here for an Excel Spreadsheet showing the start of a StochRSI calculation. Interpretation It is important to remember that StochRSI is an indicator of an indicator, which makes it the second derivative of price. This means it is two steps (formulas) removed from the price of the underlying security. Price has undergone two changes to become StochRSI. Converting prices to RSI is one change. Converting RSI to the Stochastic Oscillator is the second change. This is why the end product (StochRSI) looks much different than the original (price).stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 2/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com StochRSI has characteristics similar to most bound momentum oscillators. First, it can be used to identify overbought or oversold conditions. A move above .80 is considered overbought, while a move below .20 is considered oversold. Second, it can be used to identify the short-term trend. As a bound oscillator, the centerline is at .50. StochRSI reflects an uptrend when consistently above .50 and a downtrend when consistently below .50. Because this indicator is quite volatile, some smooting with a moving average can help for short-term trend identification. Overbought/Oversold Trend identification is the key to successfully choosing between overbought and oversold levels. It is important to look for oversold conditions when the bigger trend is up and overbought conditions when the bigger trend is down. In other words, look for trades in the direction of the bigger trend. 14-day StochRSI would be considered a short-term indicator. Therefore, it is important to identify the medium-term trend when looking for overbought and oversold conditions. Chart 2 shows Boeing in a medium-term uptrend with StochRSI(14) becoming oversold in January and February. First, the medium-term was deemed up because the 10-day SMA was above the 60-day SMA. With an uptrend in place, oversold conditions were preferred to overbought conditions. StochRSI became oversold at least four times from December to February. For what it is worth, 14-day RSI did not become oversold during this timeframe because it is less sensitive.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 3/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com Oversold is not the same as bullish though. It serves as a warning to watch for a bounce. A catalyst is still needed to solidify the low and signal an actual upturn. In this example, chartists could look for prices to break above the 10-day SMA or for StochRSI to break above .50, its centerline. Chart 3 shows Flour Corp (FLR) within a downtrend and StochRSI registering overbought readings. First, the medium-term trend is down because the 10-day SMA is below the 60-day SMA. This means oversold readings are ignored and overbought readings become the focus. StochRSI moved above .80 in mid October and early November (red arrows). These overbought readings suggested that the oversold bounce could end soon. Confirmation came when StochRSI moved back below .50 (red dotted lines). Chartists could also look for the stock to break back below its 10-day SMA to signal a short- term down turn.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 4/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com Trend ID StochRSI is quite a volatile oscillator that frequently becomes overbought and oversold. For short-term trend identification, it can help to lengthen the calculation period and apply a short moving average to smooth the data. Momentum favors rising prices when the 10-day SMA of StochRSI is above .50 and falling prices when below .50. Chart 4 shows Chevron (CVX) with 20-day StochRSI and a 5-day SMA of the indicator. The 5-day SMA moved above .50 in mid February just after the stock gapped higher. The gap and moving average cross above .50 were short-term bullish signals. A falling flag/wedge formed in late February. Notice how CVX found support in the gap zone. The uptrend continued with a flag/wedge breakout and the stock advanced above 80. Even though StochRSI dipped below .50 in late March, the 5-day SMA held above .50 to keep the uptrend alive until late April. This short-term signal turned into a two month uptrend.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 5/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com Unfortunately, not all signals are this picture perfect. There will be whipsaws, even when using a 5-day SMA with 20-day StochRSI. For example, a consolidation during a trend can cause the 5-day SMA of StochRSI to gyrate above/below the .50 line before continuing or reversing the trend. Chart 5 shows Yahoo! with 20-day StochRSI and its 5-day SMA for smoothing. The moving average broke above .50 in mid February to turn momentum bullish. This was followed by a resistance breakout for Yahoo! the first day of March. As the stock consolidated with a falling channel in late March, the 5- day SMA for StochRSI(20) dipped below .50 twice (red oval). These dips proved short-lived as the stock broke channel resistance and StochRSI moved above .80 to show strength. The trend did not end until the 5-day SMA moved below .50 AND Yahoo! gapped down.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 6/8
• 6/2/12 StochRSI - ChartSchool - StockCharts.com Chart 6 shows Yahoo! with a bearish signal from StochRSI that did not take hold right away. The 5-day SMA for 20-day StochRSI moved below .50 to turn momentum bearish the second week of October. Yahoo! broke support for confirmation, but this break did not hold as the stock surged to 18 a few days later. The immediate recovery and bounce back above 17 formed a bear trap. Even though Yahoo! surged, the 5-day SMA for StochRSI remained below .50 and momentum did not confirm. The subsequent gap above 17.50 turned out to be an exhaustion gap as Yahoo! failed at resistance (18), filled the gap, broke support again and moved sharply lower into November. Talk about volatility. Conclusion StochRSI is like RSI on steroids. RSI produces relatively fewer signals and StochRSI dramatically increases the signal count. There will be more overbought/oversold readings, more centerline crosses, more good signals and more bad signals. Speed comes at a price. This means it is important to use StochRSI with other aspects of technical analysis for confirmation. The examples above use gaps, support/resistance breaks and price patterns to confirm StochRSI signals. Chartists can also employ other complementary indicators, such as On Balance Volume (OBV) or the Accumulation Distribution Line. These volume based indicators do not overlap with momentum oscillators. Chartists should also experiment with various settings and learn the nuances of StochRSI before using it in the real world. Using with SharpCharts The StochRSI indicator can be charted as an indicator using the SharpCharts tool. The "parameters" value specifies the number of periods used in calculation (default is 14). The indicator can be set above, below or behind the underlying price plot. A moving average can be applied by clicking the advanced options arrow (green) and adding an overlay. Click here to see a live example of StochRSI. Suggested Scansstockcharts.com/school/doku.php?id=chart_school:technical_indicators:stochrsi 7/8
• 6/2/12 TRIX - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » TRIX TRIX Introduction TRIX is a momentum oscillator that displays the percent rate of change of a triple exponentially smoothed moving average. It was developed in the early 1980s by Jack Hutson, an editor for Technical Analysis of Stock s and Commodities magazine. With its triple smoothing, TRIX is designed to filter insignificant price movements. Chartists can use TRIX to generate signals similar to MACD. A signal line can be applied to look for signal line crossovers. A directional bias can be determined with the absolute level. Bullish and bearish divergences can be used to anticipate reversals. Calculation TRIX is the 1-period percentage rate-of-change for a triple smoothed exponential moving average (EMA), which is an EMA of an EMA of an EMA. Here is a breakdown of the steps involved for a 15 period TRIX. 1. Single-Smoothed EMA = 15-period EMA of the closing price 2. Double-Smoothed EMA = 15-period EMA of Single-Smoothed EMA 3. Triple-Smoothed EMA = 15-period EMA of Double-Smoothed EMA 4. TRIX = 1-period percent change in Triple-Smoothed EMA The table and chart below provide examples for the 15-day EMA, double-smoothed EMA and triple-smoothed EMA. Notice how each EMA lags price a little more. Even though exponential moving averages put more weight on recent data, they still contain past data that produces a lag. This lag increases with each smoothing.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 1/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com The blue line is the price plot for SPY. It is clearly the most jagged (volatile) of the four lines. The red line is the 15-daystockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 2/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com EMA, which follows the price plot the closest. The green line is the double-smoothed EMA and the purple line is the triple- smoothed EMA. Notice how these two lines turn flatter as the lag increases. TRIX is negative as long as the triple-smoothed 15-day EMA is moving lower. TRIX turns positive when the triple-smoothed 15-day EMA turns up. The extra smoothing insures that up turns and down turns are kept to a minimum. In other words, it takes more than a one-day advance to reverse a downtrend. Interpretation TRIX (15,9) is quite similar to MACD (12,26,9). Both are momentum oscillators that fluctuate above and below the zero line. Both have signal lines based on a 9-day EMA. Most notably, both lines have similar shapes, signal line crossovers and centerline crosses. The biggest difference between TRIX and MACD is that TRIX is smoother than MACD. The TRIX lines are less jagged and tend to turn a bit later.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 3/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com With the similarities outweighing the differences, signals applicable to MACD are also applicable to TRIX. There are three main signals to watch for. First, signal line crossovers are the most common signals. These indicate a change in direction for TRIX and price momentum. A cross above the signal line is the first bullish indication, while a cross below is the first negative implication. Second, centerline crossovers provide chartists with a general momentum bias. The triple-smoothed moving average is rising when TRIX is positive and falling when negative. Similarly, momentum favors the bulls when TRIX is positive and the bears when negative. Third, bullish and bearish divergences can alert chartists of a possible trend reversal. Signal Line Crossovers Signal line crossovers are the most common TRIX signals. The signal line is a 9-day EMA of the TRIX. As a moving average of the indicator, it trails TRIX and makes it easier to spot turns. A bullish crossover occurs when TRIX turns up and crosses above the signal line. A bearish crossover occurs when TRIX turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move. Due diligence is required before relying on these frequent signals. Volatility in the underlying security can also increase the number of crossovers.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 4/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com The chart above shows Intel (INTC) and TRIX with six signal line crosses in a seven month period. That is almost one per month. There were three good signals and three bad signals resulting in whipsaws (yellow area). The bullish crossover in June occurred near the top, the bearish crossover in late June occurred near the low and the bullish crossover in July occurred near the top. In the absence of a strong move, the lag from the triple-smoothed EMA results in late signals that produce losses. The bearish signal line cross in August foreshadowed a sharp decline and the bullish signal line cross in mid September foreshadowed a strong advance. Centerline Crossovers The centerline crossover indicates when the cup is half full (bullish) or half empty (bearish). Think of the centerline as the 50 yard line in a football game. The offense has the edge after crossing the 50 (mid point), while the defense has the edge as long as the ball remains beyond the 50. As with signal line crossovers, these centerline crossovers produce both good signals and bad signals. The key, as always, is to minimize losses on the bad signals and maximize gains with the good signals.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 5/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com The chart above shows Raytheon (RTN) with five signals over a 16 month period. The first three were bad because the stock changed direction soon after the signals. In other words, a trend failed to take hold. The fourth signal (November 2009) coincided with a resistance breakout and foreshadowed a 20% advance. Great signal! This is also a classic example of combining indicator signals with chart signals for reinforcement. The resistance breakout on the price chart and the centerline cross for the TRIX reinforced each other. TRIX produced a nice bearish signal in May 2010 as RTN subsequently declined around 20%. Divergences Bullish and bearish divergences form when the security and the indicator do not confirm one another. A bullish divergence forms when the security forges a lower low, but the indicator forms a higher low. This higher low shows less downside momentum that may foreshadow a bullish reversal. A bearish divergence forms when the security forges a higher low, but the indicator forms a lower high. This lower high shows waning upside momentum that can sometimes foreshadow a bearish reversal. Before looking at a successful divergence, note the BHP Billiton (BHP) chart with several unsuccessful divergences.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 6/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com Bearish divergences do not work well in strong uptrends. Even though momentum seems to be waning because the indicator is producing lower highs, momentum still has a bullish bias as long as the indicator is above its centerline. Upward momentum may be less positive, but it is still positive as long as the cup is half full. The rise is just not as fast as before. The opposite is true for bullish divergences. These do not work well in strong downtrends. Even though the indicator shows less downside momentum with higher lows, downward momentum is still stronger than upward momentum as long as the indicator remains below its centerline. When bullish and bearish divergences work, they do work great. The trick is separating the bad signals from the good signals. The chart below shows Ebay (EBAY) with a successful bullish divergence. The stock moved to a lower low in early July, but TRIX held well above its prior low and formed a bullish divergence. The first potential confirmation came when TRIX moved above its signal line. However, there were no confirmations on the chart at the time. These came a little later. The green arrows show EBAY breaking chart resistance with good volume and TRIX moving into positive territory. Even though confirmation occurred well off the low, there were enough signs of strength to validate the breakout.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 7/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com Conclusions TRIX is an indicator that combines trend with momentum. The triple smoothed moving average covers the trend, while the 1-period percentage change measures momentum. In this regard, TRIX is similar to MACD and PPO. The standard setting for TRIX is 15 for the triple smoothed EMA and 9 for the signal line. Chartists looking for more sensitivity should try a shorter timeframe (5 versus 15). This will make the indicator more volatile and better suited for centerline crossovers. Chartists looking for less sensitivity should try a longer timeframe (45 versus 15). This will smooth the indicator and make it better suited for signal line crossovers. As with all indicators, TRIX should be used in conjunction with other aspects of technical analysis, such as chart patterns.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 8/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com SharpCharts TRIX can be set as an indicator above, below or behind a securitys price plot. It is easy to compare indicator/price movements when the indicator is placed behind the price plot. Once the indicator is chosen from the drop down list, the default parameter setting appears (15,9). These parameters can be adjusted to increase or decrease sensitivity. The signal line default is 9, which can also be adjusted. Click here for a live example of TRIX.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 9/11
• 6/2/12 TRIX - ChartSchool - StockCharts.com Suggested Scans TRIX Bullish Signal Line Cross: This scan reveals stocks that meet four criteria. First, they must be above their 200-day moving average to be in an overall up trend. Second, the TRIX must be negative to signal a pullback. Third, the TRIX crossed its signal line and turned up. Fourth, volume moved above the 250-day average to show an increase in buying pressure. TRIX Bearish Signal Line Cross: This scan reveals stocks that meet four criteria. First, they must be below their 200-day moving average to be in an overall down trend. Second, the TRIX must be positive to signal a bounce. Third, the TRIX crossed its signal line and turned down. Fourth, volume moved above the 250-day average to show an increase in selling pressure. Further Study Understanding MACD Technical Analysis - Power Tools for Active Investors Gerald Appel and Edward Dobson Gerald Appelstockcharts.com/school/doku.php?id=chart_school:technical_indicators:trix 10/11
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Click here for an Ultimate Oscillator calculation in an Excel Spreadsheet.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 2/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com above short-term resistance in early September for further confirmation. The chart below shows American Eagle (AEO) with a smaller bullish divergence signal. The Ultimate Oscillator moved to oversold levels (<30) as the stock fell in early June. While the stock moved to new lows in late June, the indicator held above its prior low and above 30. The subsequent break above the intermittent high confirmed the bullish divergence signal. Also notice that AEO broke above resistance with a four day surge. Even those who missed the breakout got a second chance as the stock pulled back in August and again broke resistance.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 4/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Sell Signal There are three steps to a sell signal. First, a bearish divergence forms between the indicator and security price. This means the Ultimate Oscillator forms a lower high as price forges a higher high. The lower high in the oscillator shows less upside momentum. Second, the high of the bearish divergence should be above 70. This is to insure that prices are somewhat overbought or at a relative extremity. Third, the oscillator falls below the low of the bearish divergence to confirm a reversal.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 5/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Caterpillar surged to a new high in late April, but the Ultimate Oscillator failed to confirm this high and formed a lower high. Also notice that the indicator became overbought in mid April. The subsequent break below the divergence low in late April confirmed the bearish signal. CAT broke trendline support two days later and declined sharply into early June.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 6/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com The chart above shows Starbucks with an unconfirmed bearish signal and then a confirmed signal. The Ultimate Oscillator became overbought in the latter part of April. As the stock moved to new highs, the indicator forged lower highs in mid May and again in late June. A bearish divergence was working in mid May, but the indicator never broke its divergence low for confirmation. After a bigger divergence formed, the indicator broke its divergence low at the end of June to foreshadow a rather sharp decline. Timeframes The Ultimate Oscillator can be used on intraday, daily, weekly or monthly charts. It is sometimes necessary to adjust the parameters to generate overbought or oversold readings, which are part of the buy and sell signals. Relatively docile stocks or securities may not generate overbought or oversold readings with the default parameters (7,14,28). Chartists need to increase sensitivity with shorter timeframes. The chart for Boeing (BA) shows the Ultimate Oscillator (7,14,28) trading between 30 and 70 for six months. There were no overbought or oversold readings. Shortening the timeframe to (4,8,16) increased sensitivity and generated at least six overbought or oversold readings. The opposite is true for securities with high volatility. It is sometimes necessary to lengthen the timeframes to reduce sensitivity and the number of signals.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 7/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Conclusions The Ultimate Oscillator is a momentum oscillator that incorporates three different timeframes. Traditional signals are derived from bullish and bearish divergence, but chartists can also look at actual levels for a trading bias. This usually works better with longer parameters and longer trends. For example, the Ultimate Oscillator (20,40,80) and price trend favors the bulls when above 50 and the bears when below 50. As with all indicators, the Ultimate Oscillator should not be used alone. Complementary indicators, chart patterns and other analysis tools should be employed to confirm signals. Using with SharpCharts The Ultimate Oscillator is available as a SharpCharts indicator that can be placed above, below or behind the price plot of the underlying security. Placing it directly behind the price plot in a bright color makes it easy to compare indicator movements with price movements. Users can click the green arrow next to "advanced options" to add horizontal lines or a moving average.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 8/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Further Study Murphys book has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to the Commodity Channel Index. Technical Analysis Explained shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pringstockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 9/10
• 6/2/12 Ultimate Oscillator - ChartSchool - StockCharts.com Send us your Feedback! Advertisement: Best ETF Screener Free screener helps you find best ETFs for you. Fast & Free. Jemstep.com/ETF-Screener Jim Cramers Stock Picks Get Action Alerts PLUS. Trade Like Jim Cramer. Get a Free Trial Now. www.thestreet.com/JimCramer Prudential Investments Learn About Prudentials Mutual Funds Family! www.investments.prudential.com Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2011 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:ultimate_oscillator 10/10
• 6/2/12 William %R - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » William %R William %R Introduction Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of the Fast Stochastic Oscillator. Also referred to as %R, Williams %R reflects the level of the close relative to the highest high for the look-back period. In contrast, the Stochastic Oscillator reflects the level of the close relative to the lowest low. %R corrects for the inversion by multiplying the raw value by -100. As a result, the Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is different. Williams %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought. Readings from -80 to -100 are considered oversold. Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams %R. Calculation % =(ihs Hg -Coe/HgetHg -Lws Lw *-0 R Hget ih ls)(ihs ih oet o) 10 Lws Lw=lws lwfrtelo-akpro oet o oet o o h okbc eid HgetHg =hgethg frtelo-akpro ihs ih ihs ih o h okbc eid % i mlile b -0 cretteivrinadmv tedcml R s utpid y 10 orc h neso n oe h eia. The default setting for Williams %R is 14 periods, which can be days, weeks, months or an intraday timeframe. A 14- period %R would use the most recent close, the highest high over the last 14 periods and the lowest low over the last 14 periods.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 1/9
• 6/2/12 William %R - ChartSchool - StockCharts.com ]] Interpretation As with the Stochastic Oscillator, Williams %R reflects the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high- low range is 10 (110 - 100), which is the denominator in the %R formula. The highest high less the close equals 2 (110 - 108), which is the numerator. 2 divided by 10 equals .20. Multiply this number by -100 to get -20 for %R. Williams %R would equal -30 if the close was 103 (.30 x -100). The centerline, -50, is an important level to watch. Williams %R moves between 0 and -100, which makes -50 the midpoint. Think of it as the 50 yard line in football. The offense has a higher chance of scoring when it crosses the 50 yard line. The defense has an edge as long as it prevents the offense from crossing the 50 yard line. A Williams %R cross above -50 signals that prices are trading in the upper half of their high-low range for the given look-back period. This suggests that the cup is half full. Conversely, a cross below -50 means prices are trading in the bottom half of the given look-back period. This suggests that the cup is half empty. Low readings (below -80) indicate that price is near its low for the given time period. High readings (above -20) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with thestockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 3/9
• 6/2/12 William %R - ChartSchool - StockCharts.com Momentum Failure The failure to move back into overbought or oversold territory signals a change in momentum that can foreshadow a significant price move. The ability to consistently move above -20 is a show of strength. After all, it takes buying pressure to push %R into overbought territory. Once a security shows strength by pushing into overbought territory more than once, a subsequent failure to exceed this level shows weakening momentum that can foreshadow a decline. The chart above shows Cisco with 14-day %R. The stock was strong with numerous overbought readings from February to April. Even after the plunge below -80 in early April, %R surged back above -20 to show continuing strength. After a few more weeks of overbought readings, %R plunged to oversold levels in early May. This deep plunge showed strong selling pressure. The subsequent recovery fell short of -20 and did not reach overbought territory. This provided the second sign of weakness. After failing below -20, the decline below -50 signaled a downturn in momentum and the stock declined rather sharply. Another failure just below -20 in mid June also resulted in a sharp decline.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 5/9
• 6/2/12 William %R - ChartSchool - StockCharts.com The chart above shows TJX Companies (TJX) with 28-day Williams %R. Chartists can adjust the look-back period to suite their analysis objectives. A longer time frame makes the indicator less sensitive. After becoming overbought in October, the indicator moved lower and became oversold twice in December. The January surge carried %R into overbought territory and the stock broke channel resistance. These were promising signs. On the subsequent pullback, %R held above -80 and did not become oversold. This showed underlying strength. The subsequent move above -50 foreshadowed a sharp advance over the next few months. Conclusions Williams %R is a momentum oscillator that measures the level of the close relative to the high-low range over a given period of time. In addition to the signals mentioned above, chartists can use %R to gauge the six month trend for a security. 125-day %R covers around 6 months. Prices are above their 6-month average when %R is above -50, which is consistent with an uptrend. Readings below -50 are consistent with a downtrend. In this regard, %R can be used to help define the bigger trend (six months). Like all technical indicators, it is important to use the Williams %R in conjunction with other technical analysis tools. Volume, chart patterns and breakouts can be used to confirm or refute signals produced by Williams %R.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 6/9
• 6/2/12 William %R - ChartSchool - StockCharts.com Using with SharpCharts Williams %R is available as an indicator for SharpCharts. The default setting is 14, but users can opt for a shorter timeframe to produce a more sensitive oscillator or a longer timeframe to produce a less sensitive oscillator. Once selected, the indicator can be place above, below or behind the underlying price plot. Click on "advanced options" to add a moving average, horizontal line or other indicator. A 3-day SMA can be added as a signal line. Click here for a live example.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 7/9
• 6/2/12 William %R - ChartSchool - StockCharts.com Suggested Scans Williams %R Turns Up from Oversold Levels: This scan searches for stocks that are trading above their 200-day moving average to define a long-term uptrend. A pullback is identified when %R moves below -80 and a subsequent upturn occurs when %R moves above -50. Williams %R Turns Down from Overbought Levels: This scan searches for stocks that are trading below their 200-day moving average to define a long-term downtrend. An oversold bounce is identified when %R moves above -20 and a subsequent downturn occurs when %R moves below -50. Further Studystockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 8/9
• 6/2/12 William %R - ChartSchool - StockCharts.com Technical Analysis of the Financial Markets has a chapter devoted to momentum oscillators and their various uses. Murphy covers the pros and cons as well as some examples specific to the %R and the Stochastic Oscillator. Prings book shows the basics of momentum indicators by covering divergences, crossovers and other signals. There are two more chapters covering specific momentum indicators with plenty of examples. Technical Analysis of the Financial Markets Technical Analysis Explained by Martin Pring John J. Murphy Martin Pring Send us your feedback! cs-percentr.xls Advertisement: RealMoney Become a more successful investor with RealMoney - start today. www.TheStreet.com/RealMoney Bad Food for Diabetes Foods to eat & avoid to control blood sugar. From Today Show expert www.JoyBauer.com Preferred Penny Stocks Dont Miss The Next Penny Stock To Take Off. Get Our Free Alerts! www.Preferredpennystocks.com Data provided by Interactive Data Corp. Unless otherwise indicated, all data is delayed by 20 minutes © 1999-2012 StockCharts.com. All Rights Reserved.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:williams_r 9/9
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com StockCharts.com - ChartSchool Learn more about Technical Analysis and Charting Terminology You are here: StockCharts.com » ChartSchool » Technical Indicators and Overlays » StockCharts Technical Rank StockCharts Technical Rank Introduction The StockCharts Technical Rank (SCTR) is a numerical score that Advertisement ranks a stock within a group of stocks. The methodology for these rankings comes from the wisdom of John Murphy, author of many books on technical analysis and contributor to the Market Message at StockCharts.com. Stocks are assigned a score based on six key indicators, which cover different timeframes. These indicator scores are then sorted and assigned a technical rank. Using SCTR tables, chartists can sort stocks according to their technical rank. This makes it easy to identify the technical leaders and laggards within a specific group. Note that leveraged and inverse ETFs are excluded because above average volatility and inverse price movements skew the results. The VIX ETF (VXX) is also excluded because it moves inverse to the S&P 500. Calculation It takes two steps to calculate the StockCharts Technical Rank (SCTR). First, each stock is "scored" based on six different technical indicators. These six indicators can be subdivided into three groups: long-term, medium-term and short-term. The box below details these indicators, the relevant timeframe and the weightings. Ln-emIdctr (egtn) ogTr niaos wihig *Pretaoeblw20dySA(0) ecn bv/eo 0-a M 3% *15DyRt-fCag (0) 2-a aeo-hne 3% Mdu-emIdctr (egtn) eimTr niaos wihig *Pretaoeblw5-a SA (5) ecn bv/eo 0dy M 1% *2-a Rt-fCag (5) 0dy aeo-hne 1% SotTr Idctr (egtn) hr-em niaos wihig *3dysoeo POHsorm(% -a lp f P-itga 5) *1-a RI(% 4dy S 5) Except for the 3-day slope of the PPO-Histogram, the raw numbers are used to calculate the indicator score. For example, if a stock is 15% above its 200-day moving average, then this indicator will contribute 4.5 points to the total indicator score (15 x .30 = 4.5). If the 20-day Rate-of-Change is -7%, then this indicator will contribute a negative 1.05 points to the total indicator score (-7 x .15 = -1.05). A multiplier is used with the 3-day slope of the PPO-Histogram to arrive at a number between 0 and 100 for contribution to the indicator score. After this first calculation round, StockCharts.com then ranks these stocks by their indicator score. Keep in mind that these stocks are ranked solely within their group, such as the S&P 500, S&P 400 or S&P 600. This article will first show a simplified example using ten stocks sorted by indicator score. The stock with the highest score gets the highest technical rank (10), while the stock with the lowest score gets the lowest technical rank (1). The rankings are then filled in according to the indicator score.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 1/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com StockCharts Technical Rank goes into much more detail. First, the rankings extend from 0.00 to 99.99, with 0 being the absolute weakest and 99.99 being the absolute strongest. No stock will score a perfect 100. Second, StockCharts.com creates "buckets" to sort the stocks within a group. These are like percentiles. Using the S&P 500 as an example, ten equal buckets would be created and each bucket would have 50 stocks (50 x 10 = 500). The 50 stocks with the lowest indicator scores will go into the first bucket and have a SCTR ranging from 0 to 10. The 50 stocks with the highest indicator scores will go into the second bucket and have a SCTR ranging from 90 to 99.99. Each bucket will then be filled accordingly and further sorted within the bucket. The end result is 500 stocks ranked from 0 to 99.99 and spread relatively evenly across the ranking pool. Interpretation The indicator score is unique and powerful because it accounts for several timeframes. It is not tethered to one specific timeframe. A stock must score well with all indicators and all timeframes to earn a top indicator score and technical rank. The indicator score puts more weight on the two long-term indicators, which account for 40% of the total score. This makes sense because the long-term trend is the strongest force. The weightings decline as scoring moves to the short-term indicators. The medium-term indicators account for 35% and the short-term indicators account for 25%. Together, the long-term and medium- term indicators account for 75% of the total score. The StockCharts Technical Rank shows how a stock is performing relative to its peers, not a benchmark index. Indices, such as the S&P 500, are dominated by large-caps and may not truly reflect the market as a whole. Instead of benchmarking to one index, SCTR sorts all stocks within a specific universe, such as the S&P 500, S&P MidCap 400 or S&P SmallCap 600. In this regard, chartists can see how Apple is performing relative to Amazon, IBM and the rest of the stocks in the S&P 500.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 2/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com SCTR tables can easily be sorted to separate the strongest stocks from the weakest. In any given SCTR universe, the top 10% will rank between 90 and 100, while the bottom 10% will rank between 0 and 10. A stock scoring 50 would be average, showing neither relative weakness nor relative strength. In general, scores between 40 and 60 are considered average. Signs of technical weakness start to appear as scores move below 40. Signs of technical strength emerge when scores move above 60. Long-term Indicators There are two percentage-based long-term indicators. First, the indicator score accounts for how far a stock is from its 200-day moving average. This classic moving average, which is regularly used by John Murphy and other top technical analysts, has become the gold standard for assessing the long-term trend. A stock is in a long-term uptrend when above the 200-day SMA and in a long-term downtrend when below. The distance from the 200-day determines trend strength. A strong uptrend is present when price is well above the 200-day. Conversely, a strong downtrend is present when price is well below the 200-day. The 125-day Rate-of-Change is the second long-term indicator. This is a simple indicator that measures the percentage price change over the last 125 days, which is around six months. Strong stocks will show the largest gains, while weak stocks will show the largest losses. It is a straight-forward indicator designed to measure pure strength or weakness. The first chart shows Home Depot with the 200-day SMA (red) and the 125-day Rate-of-Change in the indicator window. Note that HD had an SCTR score of 97.4 on December 5th (dotted blue line). Price was over 40% higher than its 200-day SMA and the 125-day Rate-of-Change was above 20%. Such strength in these long-term indicators packs a big positive punch for the technical rank.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 3/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com The second chart shows Whirlpool (WHR) with the same indicators, but a completely different technical picture. Note that WHR has a SCTR score of 3.50, which is in the bottom 10%. The stock is trading over 25% below its 200-day SMA and the 125-day Rate-of-Change is below -30%. WHR recently hit a new 52-week low, which is indicative of a long-term downtrend. This weakness is clearly confirmed by the low technical rank.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 4/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com Medium-term Indicators The next two indicators cover the medium-term picture. A 50-day moving average covers around 2 1/2 months of trading. A stock is trending higher when above the 50-day SMA and trending lower when below the 50-day. This positive effect is compounded when a stock is trading above both the 200-day SMA and 50-day SMA. The converse is true when a stock is trading below both moving averages. The 20-day Rate-of-Change measures the percentage price change over a 20-day period, which is about a month. Again, stocks with big positive price changes over a 20-day period show above average strength that will be reflected in the technical rank. A big decline over a 20-day period would negatively affect the technical rank. The first chart shows Home Depot with the 50-day SMA (green) and the 20-day Rate-of-Change in the indicator window. Remember, HD had an SCTR score of 97.4 on December 5th (dotted blue line). Medium-term, price was over 10% above than its 50-day SMA and the 20-day Rate-of-Change was greater than 9%. Those are mighty strong numbers.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 5/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com The second chart shows Whirlpool (WHR) with the same indicators, but a completely different technical picture - again. Remember, WHR had a SCTR score of 3.50 on December 5th. The stock was trading over 5% below its 50-day SMA and the 20-day Rate-of-Change was below -2.5%. These numbers are not that drastic and definitely an improvement over the levels seen in late November. However, ranked with the other 500 S&P 500 stocks, these negative numbers did not help Whirlpool and kept its technical rank in the bottom 10%.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 6/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com Short-term Indicators The two short-term indicators account for 25% of the indicator score. First, 14-day RSI is used to gauge short-term momentum. Developed by Welles Wilder, this classic momentum oscillator fluctuates between 0 and 100. High levels (above 60) reflect bullish momentum, while low levels indicate bearish momentum (below 40). The 3-day slope of the PPO-Histogram is also used to gauge short-term momentum. The Percentage Price Oscillator (PPO) measures the percentage difference between the 9-day EMA and the 26-day EMA of a stock. The PPO-Histogram is the difference between the PPO and its 9-day EMA. In a sense, the PPO measures momentum and the PPO-Histogram measures the momentum of the PPO. Taking this indicator one step further, the 3-day Slope of the PPO-Histogram measures the degree of change in the PPO-Histogram over a 3-day period. The slope is simply the rise over the run (rise/run), which is the 3-day change in the PPO-Histogram divided by 3. SharpCharts does not have an indicator for this, but a quick look at the charts tells us if the slope is positive or negative. We can also see when the slope is relatively steep or flat. A steep slope reflects a sharp change, while a flat slope reflects a slight change. The first chart shows Home Depot with 14-day RSI in red and the Percent Price Oscillator (PPO) with its histogram in the indicator window. Keep in mind that HD has a SCTR score of 97.4. RSI shows strength because it was trading above 70 at the time. In fact, notice that RSI was at its highest level in over six months. This strong reading contributed to the high technical rank for HD. The last three bars of the histogram define the slope. There is a sharp rise from the first bar to the third, which is a positive slope.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 7/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com The second chart shows Whirlpool (WHR) with the same short-term indicators. Remember, WHR had a SCTR score of 3.50. 14-day RSI bounced off its late November low, but remains below 50. Short-term momentum is neutral at best, slightly bearish at worst. The 3-day slope for the PPO-Histogram is, however, positive. Notice that the first bar is in negative territory and the third bar is in positive territory. The rise is not that steep though. This indicates that the 3-day slope of the PPO-Histogram is not contributing that much to the indicator score. Also keep in mind that this indicator accounts for just 10% of the total score.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 8/10
• 6/2/12 StockCharts Technical Rank - ChartSchool - StockCharts.com Using SCTR The StockCharts Technical Rank feature can be accessed from the SCTR page (here). Once on the page, users can choose their stock universe. Chartists can also choose between end-of-day and intraday. End-of-day is based on the most recent daily close. Intraday is based on price levels at that particular point in time. Indicator, such as, 14-day RSI and the 200-day Moving Average, will be based on the intraday price levels too. Once working with a SCTR table, users can sort the columns with the double arrows. Sorting can be by industry group, SCTR, SCTR Change or Close. The SCTR change is the change in SCTR values from one period to the next. Sorting by this column will show chartists which stocks had the biggest changes in their technical rank. This feature can be used to spot big movers. Note that leveraged and inverse ETFs are excluded because above average volatility and inverse price movements skew the results. The VIX ETF (VXX) is also excluded because it moves inverse to the S&P 500. Click here to see the StockCharts Technical Rank page live.stockcharts.com/school/doku.php?id=chart_school:technical_indicators:sctr 9/10