Explanation of
terms and ideas
I follow the stock market because I love it. It’s a challenge, a hobby,
a passion. And, once in awhile, I can make some money. I’m happy to share my
observations and welcome a dialogue.
It’s important for anyone who reads my observations to understand what
I do, and what I think about technical analysis. The price of stocks, indices,
commodities, etc. can be charted. Usually this is done with a bar graph and the
price can be applied in any time frame. For my “reports” I use the daily
charts.
Over the years, people much smarter than me have developed mathematical
models to analyze the movement of these prices. Some ideas are very simple,
like trend lines above and below the highest and lowest prices. Others are very
complex like the rate of change of the price, the average of the price over
time, momentum, etc. You can read all about the various methods in countless
books. I would recommend a simple Technical Analysis text book, such as one by
John Murphy.
Every night I look at around 30 different models that are in fairly
common use. Most I have not changed in anyway from their author’s intended
purpose. A few I have “tweaked” after years of observation and note taking. I
report what I see and then try to sum up what I think it all means.
But here is the most important part. I’m not sure I “believe” any of
it. That’s right. I’m the most obsessed technical analyst in the world, but I
think it’s all pretty silly. That isn’t to say it isn’t helpful. In fact, it’s
critical to the success of trading. What I’m trying to say is that I understand
that it is what it is – a valiant, but ultimately foolish – attempt to make
order out of chaos. And most important, it ONLY analyzes what has happened.
There is NOTHING AT ALL that tells us the future.
After years of looking at this data, then seeing what happens the next
day, I have a pretty good handle on which of these indicators are more valid
than others. I, like many technicians, also look at all this data because we
believe that many others are ALSO looking at this data, so it’s important to
know what everyone else may be seeing. A simple example is the 200 day moving
average. MANY people look at this, so it’s important to know where we are in
relation to it. You will understand over time.
Finally, it’s very important for you to understand which of these
indicators are important in the short, intermediate or long term, as this
creates much confusion. For instance, some of our important TREND following
indicators may be very bearish, but some of our short term OSCILLATOR
indicators may be pointing to an oversold condition, warning of a possible
upward short term move WITHIN AN ONGOING intermediate downtrend move.
THE INDICATORS
The KING
This is my own. It is also known as the UVDV, as the packet in which
the data arrives contains up volume, down volume, among other neat stuff. The
KING is a cousin of a better known indicator which is known as the SUMMATION
index. Essentially, I count ongoing breadth – up versus down – movement among
the stocks in the NYSE. I have a running total going back to the 1970s. This is
“proprietary”. But it’s beautiful. What it’s telling us is that stocks are
either being bought or sold. Period. Or, that stock are being “accumulated or distributed”.
Big money does not move quickly in and out of the market, so this gives us a
pretty good idea of how things are going, usually over 6 -12 week periods. For
the most part we should be trading with the king, not against it, but there are
exceptions. This will usually be reported as either being positive or negative.
I also have a filter on this for the rare whipsaw, and will comment on that
when it’s important.
The MO
This is just the McClellan Oscillator. I report the numbers and will
comment when it reaches extremes.
The AD Indicator
I have several of these, but usually comment on one in particular. It’s
an old time indicator, with a short, intermediate and long term component. Mostly I report on the short term component
and will DEFINITELY let you know when this is at an extreme as it almost ALWAYS
warns of a trend change. You might find this under HAURLAN in some old TA
books. The “other” indicator is a
summation, or running total of advancing/declining issues. You may see this
referred to as the BOLTON-TREMBLAY indicator in some old texts.
The TRIN
I report the 1, 5 and 10 day simple closing trins, or ARMS index. My
experience with this is that it is modestly helpful most of the time, but VERY
helpful at extremes, and I will comment when necessary.
The AVERAGES
I report on the exponential 10 and 55 day averages, as discussed in PIT
BULL, by Marty Schwartz. This is his RED
LIGHT GREEN LIGHT. READ HIS BOOK. I will also comment on the SIMPLE 20 day
Moving Average, as this is WIDELY WATCHED and is also the CENTER LINE of the
standard Bollinger Band. And the SMA 200 when appropriate.
The Channels
I look at the ALPHA BETA TREND CHANNEL, which is an old commodity
indicator. For the most part, prices remain within the channel, and will often
bounce from one end to the other, although not “on cue”. When the price gets
too far out of the channel, this is important, as prices “like” to go back into
the channel. Also, this system has a “filter” and often is helpful for keeping
us on the right side of the trend.
I also look at the standard, daily BOLLINGER BAND, and will interpret
what I believe is happening here, too. This is VERY WIDELY followed, so it’s
important to know what these boundaries are. These may look alike but are VERY
different.
Finally, I look at my own “percent moving average” band, similar to
what is in PIT BULL, although I rarely report this.
The Oscillators
These are shorter term “momentum” indicators. I use a 5 day rate of
change indicator, referred to as the ROC. I look at the standard 14 day
RELATIVE STRENGTH INDEX, and refer to it as the RSI. This is perhaps one of the
coolest of all indicators and VERY useful at extremes and at points of
divergence. I will comment on this. I use the Williams’s %R, using fairly
standard settings. I use the Williams ULTIMATE oscillator, using his original
“default” settings. This is a GREAT indicator, and will comment on where it’s
at. I look at a variation of the SLOW
STOCHASTIC with some “proprietary” settings. This is also helpful mostly at
inflection or turning points, but can also be useful once a good trend is
underway to keep you from changing or bailing too quickly. Of course, I look at
the MACD, or moving average convergence divergence indicator. I find this most
useful in a big picture way and will report if we have “crossed over” but also
if we’ve done this above or below the zero line. A MACD that is WAY above zero
and is crossing negative “could” be a sell, but sometimes it’s better to wait
for the signal to fall below zero to “confirm” the sell. I will comment when
appropriate.
VOLUME
I use Joe Granville’s ON BALANCE VOLUME, along with a filter, again to
watch for “whipsaws”. This is a GREAT indicator, especially when used as a
“divergence” tool. I will often comment on this. I look at the ARMS EASE OF
MOVEMENT indicator, and will sometimes refer to it as the EMV.
ODD BALLS
I use a variety of old, weird indicators mostly for me to synthesize
and I may comment on them from time to time. I use a trend indicator known as
the WAVE, a 5 day PRICE summation index with a SMA 20 filter, a variation of
the ADX, mostly commenting on the POSITIVE DIRECTION and MINUS DIRECTION
indices and their relation to each other (i.e. how close together or far apart
they are). I use a variation of the
DEMAND INDEX which shows Buying and Selling Pressure, again usually commenting
on whether we’re close together or far apart and whether we’re moving towards
or away. I use a real old indicator known as the Norton High Low and another
oldie called the NOTIS %V. If you really want to learn about them, let me know
and I can dig up some very dusty, old references. Finally, (and I think I’ve
gotten them all in), I use a 5 WEEK RATE OF CHANGE along with a 21 WEEK SMA, to
keep my head in the bigger picture. The R5W is what I call the 5 week ROC.
Usually, not always, if we’re above 100 the market is heading higher or if
we’re under 100 we’re heading lower. This is a SLOW TREND indicator and NOT
useful for day to day trading. AND, I use an old VOLATILITY index I refer to as
VOL. This is NOT the popular VIX, but represents price change over time. Once
again it’s VERY useful at extremes, but also helps us determine if we’re in a
choppy (scalping) market or a smoother, trending market.
The MEAT
This is where we make money. I calculate PIVOTS using a very old technique picked up out of an old commodity
floor trader’s book. These numbers are UNCANNY. I report 5 numbers and refer to
them as PIVOT, next high, high high, and next low and low low. Usually (not always) Next High would be
considered a SELL PIVOT and NEXT LOW would be considered a BUY PIVOT. The outer
extremes are there and will be explained as needed on a daily basis. You should
learn to MARK THESE NUMBERS IN FRONT OF YOU every day. BECAUSE THEY WORK. Mathematically they make a lot of sense.
Follow them for a few days and you will be amazed. There is a lot of “talk” out
there about “pivots”, and there must be many types of pivots. Another system
for finding a short term pivot point is to keep track of where the market was
during periods of excessive tick. When important, I will comment on that, but
be aware that is distinct from my reported PIVOTS. I usually LIST the pivots
for the active SP futures contract, but will note the OEX and QQQ. I personally
use them for trading the active Bond Futures, too.
The Esoteric and the Exotic
Two more indicators I refer to are the FIBONACCI FAN LINES and the
QUAD. I think, of ALL the wacky stuff out there, none is wackier then ELLIOT
wave stuff, although there are many who can use it and “see it” and make money.
Not me. BUT, I find the FIBONANCCI FAN LINES extremely helpful. I look at short
term and intermediate fans every day, but will look at long term fans when the
occasion is right, like when we get HUGE MOVES and we have to look back years
to get a feel where we are. This is Voodoo stuff, to be sure, but in the short
term, the Fans will give us very helpful targets. Sometimes they are more
helpful than at other times, and I will usually comment on this. The QUAD or
QUADRANT level is a simple way of breaking up the price movement into zones.
For those of you familiar with Mark Cook, it is somewhat similar to his “BOX”
work. I look at short, intermediate and long term QUADS. We are always in one
zone or another, and it helps to know the upper and lower boundaries. Finally,
I may comment on some stuff like percent retracement, again, mostly because
others do and it’s helpful. If we’ve rallied and failed, it can be helpful to
know that we are back to the 66% or 50% retracement, for example. I will also
comment on the daily PUT CALL RATIOS as reported directly by the CBOT. I look
at both the equity and INDEX ratios. I also will comment on the closing PREMIUM
when important. This represents the variation of the SP futures price to the
cash closing price.
ETC.
This has been a rough overview of what I’m looking at every night. Most
of it is calculated using a nearly 20 year old DOS program with data from CSI
in
If you have questions, please email me at jim@smartdaytrader.com .
Just remember NO ONE can predict the future. I’ve looked at these
charts for years and have a pretty good feel for where we are and where could
be heading. But to make money YOU have to have a trading plan, strict money
management skills, discipline and stop loss rules.
For instance. I may report that the KING IS NEGATIVE. This means that
we are MORE LIKELY TO GO LOWER THAN HIGHER over the next few weeks or more. Yet
several days later, I may report that the ULTIMATE is very low, like 35, that
the William’s %R is at or near zero, and the RSI is touching its lower “30”
line. I might add that we are BELOW the lower alpha beta line, but the OBV “did
not confirm” the recent move down”. In this case, with a negative KING you
would either cover intermediate shorts or move your stop WAY down, or you would
use tomorrow’s pivots to look for a place to get long for a “snap back” rally,
or just stand aside until the snap back plays itself out and look for a place
to get short again.
Another helpful hint. Sometimes it seems as if half the indicators are
pointing up and half of them down. In those situations it would be best NOT TO
TRADE, or just use whatever day scalping method you use.
Finally, where we really shine is when they ALL LINE UP and move to
time-tested extremes. This is when we really get excited. At these times, we
can, with the usual appropriate fear and trepidation, load up for the big move.
USUALLY in the OPPOSITE direction. A good example would be a KING that’s been
negative for 10 weeks, an AD indicator at MINUS 1200, a high 1, 5 and 10 day
trin, a market that’s been struggling to get back into the channels, or HAS
gotten in and has been holding, an ULTIMATE oscillator coming off VERY LOW
levels and a %R that is struggling to come off of near zero levels. At these
times I would usually be giving you QUAD and FIB FAN support levels and seeing
where they compare to the daily PIVOT levels. How you use that is how you
trade. You can either bid low for OEX or DOW calls, you can begin accumulating
long SPY or QQQ or you can take a flier on long SP futures. Whatever.
Anyway, I hope this is helpful. Just follow it for awhile and you’ll
get the feel. Beauty is in the eye of the beholder. Each of us “sees” what we
see in various indicators. If you learn to just accept them for what they are
(NOT THE HOLY GRAIL), and take them with the grain of salt they deserve, over time
you will make money. PLEASE send along comments or new ideas. As Ross Perot
says, I’m all ears. Just remember: my nightly comments are based ENTIRELY ON
DAILY CLOSING CHARTS, except for the occasional reference to a weekly or a monthly
chart, when appropriate. <<JIM
RAKER>> the TECH
DOCTOR 2/1/03 UPDATE: APRIL 7, 2003