A Quick Guide to Market Clues Technical Indicators and Charts
Time Ratio Analysis can sometimes tell the experienced
trader when to expect the next high or low in a market. This technique
works especially well in a low-trend market, i.e., a trading range.
First publicized by Larry Williams, the technique uses three extrema to
generate a projection of a fourth extremum.
Finding the Next TR Low
Using the two highest points reached in the trading range, measure the difference in time between those two
highs. Multiply that time difference by the square root of phi, 1.28 (phi is
the Greek letter used to represent the Fibonacci or Golden Ratio, 1.618...).
From the lowest low between those two highs, add that time. The next low
is likely to occur at that point in the future.
Finding the Next TR High
Using two lowest points reached in the trading range, measure the difference in time between those two
lows. Multiply that time difference by the square root of phi.
From the highest high between those two lows, add that time. The next high
is likely to occur at that point in the future.
Choosing Extrema
The closer in price the two extrema (i.e., the two highs or the two lows) are, the better the technique works.
Sometimes there are more than two candidates to choose from. In many cases,
if the candidates are close together in price, most of them will project
valid TR turning points. When more than one projection results in the same
turning point, the probability is great that the projection will be a success.
Time Ratios On the Charts
Nominal Time Ratio low projections are rendered as
downward-pointing triangles, while nominal Time Ratio high projections appear
as upward-pointing triangles. The color of the triangle relates to the distance
in time between the first and third extrema (called the baseline). In
general, the longer the baseline, the more significant is the turning point
projection. These turns are referred to as "nominal" because at key trend
change points, these projections tend to invert; i.e., a nominal high
will become a low, and vice versa. In fact, this characteristic gives the
analyst an important additional clue concerning the state of the underlying
trend.
Time Ratio Projections in Table Format
Each daily chart page of the website contains a link to a page containing
the daily basis Time Ratio Projection tables where available.
There is also a link at the bottom of the daily tables to the 15-minute table page.
These tables contain
dates in the format CCYYMMDD.Q, where
CC is the century minus one, YY is the year of the century minus one, MM is
the month of the year, DD is the day of the month and Q is
the quarter-hour of the day. The quarter-hour of the day starts at zero, corresponding to the
first 15 minutes of trading. For example, the date 19980927.4 for a turn in
the S&P 500 stock market index translates to:
19 (Century minus one, or the 20th Century)
98 (Year of Century minus one, or the 99th year of the 20th Century)
09 (Month of Year, September)
27 (Day of Month, 27 September)
4 (Quarter-Hour of Day, approximately 10:30 [9:30+1:00] Eastern Time)
Other Indicators
The newsletter includes a number of charts and indicators designed to let
you analyze the various futures markets, stock indices and individual
securities. This guide is designed as an introduction for the new reader and
a refresher course for the reader who may have questions concerning the
interpretation of those indicators. In interpreting indicators, remember that
any indicator can be wrong at any time (no matter how accurate it has been
in the past).
Studies used in the charts are often identified by their title and
by a short abbreviation along the bottom of the chart. The
AD
abbreviation
stands for "AccumulationDistribution." This study measures the degree of
accumulation (buying power) and distribution (selling power) which is
occuring in the security. It is an oscillator whose theoretical range is 0-100.
Normally, the oscillator stays in the range from 30-70. Readings over 70
are termed "overbought," which is a relative term, since a security in a
strong bull market will force the AD study into the overbought zone for
long periods of time. Similarly, readings below 30 are termed "oversold,"
with the proviso that bear markets will keep the indicator in that zone for
long periods of time. More important than the actual level of the indicator
is divergence, a technique which can be applied to all oscillator-based
indicators.
Bearish divergence, a topping pattern, is formed when the price
of the security moves to a new relative high, while the oscillator makes a
lower high, especially if the previous high was in overbought territory
(above 70 on the AD).
To detect bullish divergence, look for the security
to make a series of lower lows while the oscillator makes one or more
higher lows, especially if the oscillator is oversold (below 30 on the AD).
When divergence is present, the security will often be making a top or
bottom and about to start a retracement (a rebound to previous price levelsor a drop back from a high). Divergence gives an early warning (not always
infallible, however) of a trend change. Another of our favorite technical studies is
Money Flow
a measure of whether money is flowing into or out of a security.
This indicator is calculated for each security and market we follow by subtracting
or adding each trade depending upon whether it was a downtick or an uptick to
a running dollar total. If the price downticked, it is a negative change.
If the price moved up, it is a positive change.
The value of that price change is multiplied by the volume traded; this results in a money flow delta figure.
Each money flow delta figure is added, successively, to the running money flow line.
Some people ask how it is possible for the money flow line to actually rise while
stock prices are falling. It's not only possible, it's very bullish when this happens.
And, it always precedes a big rally. It comes about when large volumes of shares are
being transacted on upticks while smaller volumes of shares are exchanged on downticks.
To illustrate with a mathematical example:
Suppose we have a hypothetical stock ABC which has last
traded at $100. Let's show how this pattern of larger volume on upticks causes the
money flow line to rise even though the stock price trades lower (we start the money
flow line at zero):
| Trades | Price Change | Money Flow Delta | Money Flow Line |
|---|
| 100 shares @ 99.75 | -0.25 | -25 | -25 |
| 200 shares @ 99.50 | -0.25 | -50 | -75 |
| 100 shares @ 99.40 | -0.10 | -10 | -85 |
| 1000 shares @ 99.50 | +0.10 | +100 | +15 |
| 100 shares @ 99.40 | -0.10 | -10 | +5 |
| 500 shares @ 99.50 | +0.10 | +50 | +55 |
| 100 shares @ 99.25 | -0.25 | -25 | +30 |
| 1000 shares @ 99.35 | +0.10 | +100 | +130 |
As you can see, the price of the hypothetical stock dropped from $100 to $99.35, but the
money flow line actually rose overall from zero to +130. This is a simplified example, obviously,
but it does illustrate our point: greater volume on the upside can make the money flow line
rise even as the price of the shares themselves decline.
Strangely enough, a stock's price can rise even when money
is flowing out of it. This pattern will often warn of an impending
collapse in the price of the stock. On the other hand, as you've seen illustrated above, a stock can be trending
downward in a bearish price pattern, but net money flow can be rising as savvy buyers
are accumulating positions in the stock at lower and lower prices. An concrete, real-world example
of this kind of accumulation: in
1988, Warren Buffet, that master value player, was buying Fannie Mae (FNM on
the NYSE) even though it was steadily dropping in price. We detected positive
money flow into the stock, an indication that the stock would soon bottom and
soar. Now, you must realize we didn't have any idea who was doing the
buying: we just noticed that the money flow line in FNM was rising and its price
was falling. That was a sure sign that the stock was under strong accumulation.
When Fannie Mae's stock price finally bottomed, after a couple of months, it took off like
a rocket, returning a 400%
profit over the next two years!
Now, we want to emphasize this point:
we didn't know it was Warren Buffet doing the buying until months later (Fortune
magazine noted that Buffet had been steadily buying the stock for months). But our
technical study revealed the pattern of his purchases and the very positive support
he was giving to the stock. And, as you may note, despite heavy buying on his part,
the price of the stock dropped day after day after day as the ``weak hands'' sold.
That is not an isolated example: we have seen many
similar patterns (both bullish and bearish cases) in many other stocks since then.
Like any other indicator, Money Flow is not 100% foolproof, but it has to rank as
one of the best ways an investor can stack the odds in his/her favor. We use this
study on all of the securities we track: stocks and futures (for the futures markets,
we use tick volume instead of actual volume to compute the value of each
transaction). Look for
MF
to identify charts showing
Money Flow
. We have an
oscillator which measures relative Money Flow which we call the
Money Flow
Divergence
oscillator, indentified as
MFD
on the charts. This type of chart ranges
from -100 (the oversold level) to 0 (the overbought level). When a security drops
below -70 we have found a strong correlation to a subsequent rebound in price. A
rise above -30 often leads to a drop in price. Readings between -70 and -30 are
neutral and are not predictive.
The
charts show what our time cycle-based model says the stock market should do in the future, based upon regular time
cycles which it has extracted from the past. Many studies of stock prices over the
past century have proven beyond a shadow of a doubt that stock prices move in
cycles, although those cycles are not always the strongest influence and are not
100% reliable (no single indicator is). Often, the Omega Predictor forecast has
been borne out in subsequent market action. However, its forecast should be used
as a probable directional indicator, not an absolute, bet-the-farm type indicator,
since cycles sometimes fail. When the Predictor forecasts a strong up or
downmove, however, the market will often follow suit. Also, look for the other
studies to confirm or reject the forecast. For instance, if the Predictor is forecasting
an important low and a rally in stocks, look for confirming buy signals on the other
studies. When the majority of indicators point the same direction, history tells us
we can rely more heavily upon that signal.
The
sentiment
indicators measure what
groups of investors and traders are doing in the market. Often these are contrary
indicators, i.e., when the majority of investors are bullish, that indicator would be
considered bearish, for most have already taken long (bullish) positions in the
market and thus fewer buyers are available to fuel those higher prices. Conversely,
when the majority is bearish (expecting lower prices), most have either sold the
market short or moved to the sidelines. That is often bullish, for short sellers have
to eventually buy back their short positions to close them (and investors with cash
on the sidelines represent potential buying power if they turn bullish). However,
these rules change in the middle of a major move: the majority is usually right at
that time and a contrary
interpretation would be wrong.
The
Dollar-Weighted Call/Put Ratio
measures short
term trading sentiment: dollar-weighting measures the degree of traders'
commitment better than a pure volume-based ratio. We divide the dollar volume
of call options by the dollar volume of put options. When the ratio is greater than
one, it indicates more commitment to the bullish camp. A ratio between zero and
one indicates a greater committment to the bearish camp.
We also track the
Traders' Consensus
figures published by Barron's Financial Weekly.
Because this survey asks futures traders whether they are bullish or bearish,
it directly reflects the positions where traders have money on the line.
And, it gives us even more information due to the nature of the
futures markets: in the futures, for every contract sold short, there must
be a contract held long. In other words, when a contract sold short is bought
back, that contract disappears. Only contracts which have been sold short
and not yet repurchased appear in the Open Interest figures published
by the exchanges for each market. That means that there must be an equal
number of contracts held in long positions as the number of contracts held in
short positions. That's a key point. That means that if the sentiment
figures say 50% of all futures traders are bullish, an equal number are
bearish. Since there are an equal number of contracts held by bulls and
bears, that's exactly neutral. However, let's say the sentiment survey
shows that only 25% of futures traders are bullish, leaving 75% who are
bearish. In that case, the number of contracts held by each group doesn't
change: they hold an equal number of contracts, but in this case,
the bulls hold three times as many contracts as the bears per trader.
Since the capital requirements say a certain amount of margin must be
held for each contract, we can say, on a rough estimate only, that the
bulls hold about three times as much capital as the bears do.
Generally, traders who are better capitalized in the futures markets
win and lesser capitalized traders lose. Thus a 25% bullish figure says
the big money is bullish.
In addition,
we also analyze the committments of three groups of futures' traders as reported
by the Commodity Futures Trading Commission every two weeks. The latter
collects actual positions (long and short) for commercial hedgers, large speculators
and small speculators for the commodity markets (including the stock and bond
futures). Activity of the large speculators and commercial hedgers can move the
markets. Commercial hedging activity is especially important, since these traders
deal with the markets from a business perspective and presumably have better
fundamental data to work from than outsiders. Committment of traders charts are
identified by the abbreviate
CT.
charts are useful in determining trends
and trend change points. This standard technical oscillator-type chart is shown
occasionally. The indicator is shown as a fast line and a slow line (the thin line is
fast, the thick line is slow). Overbought readings occur above 80, oversold readings
below 20. A crossover of the slow line by the fast line gives an early warning of
a trend change, although crossovers between 20 and 80 are less significant.
Divergence at new highs and lows in price occur when the stochastic lines form
lower highs or higher lows, respectively, and indicate a weakening in the price
trend. These early warning signs indicate a trend change is possible, but the actual
trend change has to be confirmed by other indicators. Stochastics will often be
early in calling trend changes in strong markets (either bullish or bearish markets
which have a strong underlying trend). Stochastic studies have great value in
trading-range, or choppy trend, markets where they give excellent buy and sell
signals for traders. Stochastics charts are often identified by the abbreviation
SS
(for Stochastic Study).
(
TA
) charts utilize a very basic, and very
accurate, technical analysis tool: trendlines. A general rule is that the longer a
period of time a trendline encompasses, the more important that trendline is. If the
market bounces off a support trendline, it indicates strong buying pressure; a
bounce off a resistance trendline indicates sellers dominant the market at that level.
A break of an important trendline indicates a correspondingly important change in
trend.
Percent Rising
(
PR
) analyzes stock indices by determining the percentage
of stocks within the index that are rising and plotting that percentage. Readings
above 80% rising signal a possibly reversal to the downside, while readings below
20% suggest an approaching bottom. Readings in the 50% area often coincide with
trend changes in the market.
Elliott Wave
While we can't really explain Elliott Wave, we will provide you
with this link to Elliott Wave International,
which has excellent textbooks on the subject. Elliott Wave Analysis
is best applied during strong trends and should be avoided during corrective
periods, where it gives, at best, low probability signals.
Notation. We use a labeling of waves which is clearer than the typical
seen in other publications. The main waves within a five-wave sequence are
numbered 1 2 3 4 5. If wave 1 is subdivided into a five-wave
sequence, those waves are labeled 1.1 1.2 1.3 1.4 1.5. If wave 3
is subdivided into a five-wave sequence, those internal waves would be labeled
3.1 3.2 3.3 3.4 3.5. Assume that wave 3.3 is subdivided into a
five-wave sequence; in this case, those waves would be labeled
3.3.1 3.3.2 3.3.3 3.3.4 3.3.5.
For corrections within these five-wave sequences (i.e., waves 2
and 4), the subwaves are labeled a b c [d e] (d e are
not always present). For example, wave 3.2 would be subdivided and labeled
3.2.a 3.2.b 3.2.c.
We publish raw data for this stock market sentiment indicator. Traditionally,
option sentiment figures are based only on volume and use a ratio between
puts and calls. We believe that by dollar-weighting the figures, a more
representative ratio is created. Another difference is that we generally use
a call-put ratio because high levels of the ratio correspond to "overbought"
levels on other indicators (such as oscillators), and low levels of the ratio
correspond to "oversold" levels on those indicators.
Very high ("overbought") levels of the ratio indicate a strong bullish
trend, while very low ("oversold") levels indicate a strong bearish trend.
However, since the majority of OEX options traders tend to be wrong at
significant turns in the market, the key pattern to watch for on our
dollar-weighted call-put ratio is divergence between price and indicator.
If prices, for instance, are making new highs, but the indicator is making
lower highs, a top is developing. We often observe that the market will form
a short term top within about a week after a reading of 2.0 on the indicator.
(A reading of 2.0 indicates twice as much money is going into call purchases,
a bet on further rally, versus put purchases, a bet that the market will fall.)
Of course, if the indicator subsequently makes a higher high, that short term
top will be delayed (see the discussion above concerning divergence) since
no divergence is present. In the case of a short term low developing, look
for prices to make lower lows while the indicator makes higher lows. We often
observe the market forming a low about one week after the indicator reaches
the 0.5 level. (A reading of 0.5 indicates twice as much money is going into
put purchases versus call purchases.)