A Quick Guide to Market Clues Technical Indicators and Charts

Time Ratio Analysis

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).

Accumulation-Distribution Oscillator (AD)

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):
TradesPrice ChangeMoney Flow DeltaMoney 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.


Omega Predictor - Time Cycles

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).

Trendline Analysis

( 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.

OEX Dollar-Weighted Call/Put Sentiment

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.)