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.
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)
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
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
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
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
to identify charts showing
. We have an
oscillator which measures relative Money Flow which we call the
oscillator, indentified as
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
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.
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.
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.)
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.)