Accumulation/Distribution Line

Overview
Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The rationale is that the more volume that accompanies a price move, the more significant the price move (Achelis 1995). As one may suspect, Accumulation/Distribution is a variation of the more popular OBV.

How It Is Calculated
A portion of each trading day's volume is added or subtracted from a cumulative total. The nearer the closing price is to the intraday high, the more volume is added to the cumulative total. In contrast, the nearer the closing price is to the intraday low, the more volume is subtracted to the cumulative total. If the close is exactly between the intraday high and low, nothing is added to the cumulative total.

How To interpret
Divergence analysis
When Accumulation/Distribution line moves up, it means the stock is being accumulated (bought). On the other hand, when it moves down, it shows that the stock is being distributed (sold). Divergences between Accumulation/Distribution and price imply a change is imminent. If Accumulation/Distribution moves up and price moves down, prices will probably reverse. The same logic applies when Accumulation/Distribution moves down and prices moves up.

Example

When China Petro corrected to a new high on 14 July 2005, Accumulation/Distribution line was in a falling trend. Shortly afterwards, prices reversed its direction to a downward movement.

Rules available in ChartNexus

Acc/Dis Divergence With Price
Acc/Dis is increasing with price still moving down Acc/Dis is decreasing with price still moving up

Parameters available:
Max Divergence Days - the maximum number of days during which the divergence occurs Min Divergence Days - the minimum number of days during which the divergence occurs Min Overlap Length - the minimum number of overlapping days during which price and Acc/Dis diverge Price Slope - the minimum slope of the moving average of the price Acc/Dis Slope - the minimum slope of the moving average of Acc/Dis Price MA Period - the number of days used for the period of the moving average of the price Acc/Dis MA Period - the number of days used for the period of the moving average of the Acc/Dis Acc/Dis On Right - if value is set to 1), only divergences with Acc/Dis slope on the right side of price slope are triggered

Acc/Dis Convergence With Price

Acc/Dis is increasing with price moving up Acc/Dis is decreasing with price moving down

Parameters available:

Max Convergence Days - the maximum number of days during which the convergence occurs Min Convergence Days - the minimum number of days during which the convergence occurs Min Overlap Length - the minimum number of overlapping days during which price and Acc/Dis converge Price Slope - the minimum slope of the moving average of the price) Acc/Dis Slope - the minimum slope of the moving average of Acc/Dis) Price MA Period - the number of days used for the period of the moving average of the price Acc/Dis MA Period - the number of days used for the period of the moving average of the Acc/Dis Acc/Dis On Right - if value is set to 1, only convergences with Acc/Dis slope on the right side of price slope are triggered

Acc/Dis Trend
Acc/Dis is trending upwards Acc/Dis is trending downwards

Parameters available:
t - the number of days that Acc/Dis has been trending Slope - the slope of the Acc/Dis when it is trending

References:

Achelis, S. B., Technical Analysis from A to Z, 1995

Average directional index (ADX)

Overview
The Directional Movement Index (DMI) helps determine if a security is "trending" or "trading" (moving sideways). It was developed by Welles Wilder and explained in his book, new Concepts in Technical Trading Systems. The Average Directional Index (ADX) is an MA of DMI that evaluates the strength of the current uptrend or downtrend as well as evaluates whether the stock is "trending" or "trading".

How it is calculated
ADX is an oscillator that measures the directional change or movement of an issue on a scale of 0 - 100. ADX is calculated with the following formula:

Notice from the above formula, there are two DIs, namely +DI and -DI. Since the raw data derived from the calculation are unduly volatile, they are each calculated as an average over a specific time period and the result is plotted in the same chart panel with ADX (Pring 2002).

Again, the normal default time span is 14 days (Pring 2002).

How to interpret
Trending
Unlike other oscillators, ADX tells us nothing about the direction in which a price is moving, only its trending or nontrending characteristics. Use other oscillators for this task (Pring 2002). ADX readings below 20 indicate a weak trend; whereas readings above 40 indicate a strong trend. The indicator does not tell whether the trend is bullish or bearish, but merely assesses the strength of the current trend. Thus, a reading above 40 can indicate either a strong downtrend or a strong uptrend. ADX can also be used to identify potential changes, i.e. from "trending" to "trading" .When ADX begins to move downward from 40, it is a sign that the current trend is losing strength and a trading range could develop. In similar vein, when ADX begins to move upward from 20, it is a sign that the trading range is ending and a trend could be developing. But what trend? An uptrend or downtrend ? The answer lay in monitoring the two DIs and the price (Pring 2002).

Average true range (ATR)

Overview
Introduced by Welles Wilder in his book, New Concepts in Technical Trading Systems, Average True Range (ATR) measures security's volatility, but gives no indication of price direction or duration.

How it is calculated
Wilder started with a concept called True Range(TR). TR is the greatest of the following:

If the current high/low range is large, chances are it will be used as the TR. If the current high/low range is small, it is likely that one of the other two methods would be used to calculate the TR. To ensure positive numbers, absolute values are applied to differences. ATR is a simple MA (typically 14 days) of TR.

How to interpret
Activity Levels
ATR shows volatility of a stock. Wilder found that high ATR values often occur at market bottoms following a "panic" sell-off. Low ATR values are often found during extended sideways periods, such as those found at tops and after consolidation periods (Achelis 1995).

Example

On 18 April 2005, UniFiber's price declined from a previous closing price of $0.51 to a closing price of $0.235. This resulted in high ATR readings. Extreme readings (both high and low) can mark turning points or the beginning of a move. However, ATR cannot predict direction or duration, simply activity levels. Notice that for UniFiber, its high ATR marked a turning point because prices were quickly trending up following the sharp price decline.

Bollinger bands
Overview
A useful addition to Moving Average (MA) Envelope analysis is a new approach devised by John Bollinger. Bollinger Bands is an indicator that allows users to compare volatilityand relative price levels over a period time. Bollinger Bands addresses the limitation of MA Envelope by incorporating the security price volatility. Rather than being plotted as fixed percentage above and below an MA, Bollinger Bands are calculated as standard deviations above and below an average based on closing prices. They are designed with the concept that Bollinger Bands contracts when volatility is low and expands when volatility is high.

How it is calculated
Bollinger Bands consists of 3 curves designed to encompass the majority of a security's price action. A good starting point for most things financial is a 20-day MA (Bollinger 2001). A bandwidth of 2 standard deviations provides an equally good starting point (Bollinger 2001).

Middle band = 20-day Moving Average (MA) Upper band = Middle band + 2 standard deviations Lower band = Middle band - 2 standard deviations

Standard deviation provides a good indication of volatility. Using the standard deviation ensures that the bands will react quickly to price movements and reflect periods of high and low volatility. Sharp price increases or decreases, and hence volatility, will lead to a widening of the bands. The chart below shows how Bollinger Bands looks like.

Time Frame
Some securities require longer or shorter time periods than 20-day. The best way to identify the correct MA is to look for MA that provides support to reactions, especially the first reaction after a change in trend. Suppose the market makes a low, rallies for 10 days, and then pulls back for 5 days before turning higher again and confirming the birth of the new uptrend by taking out the high for the initial 10-day rally. The correct MA would be the one that offered support at the low of the 5-day pullback. However, as the adaptivity of Bollinger Bands comes primarily from volatility and not from MA length-selection, it turns out that as you vary the length of the MA, you also need to vary the number of standard deviations used to plot the bands. The idea is to capture information from the dominant volatility cycle for the bandwidth while using the best measure of trend for the midpoint. Below are John Bollinger's (2001) recommended width parameters for Bollinger Bands:

How to interpret
Tendency for sharp price change
When the bands narrow, there is a tendency for sharp price changes to follow (Pring 2002). This, of course, is another way of saying that when prices trade in a narrow range and lose volatility, demand and supply are in a fine state of balance. In this context, narrowing of the band is always relative to the recent past, and that is where Bollinger Bands can help in visually showing the narrowing process. They also give us some indication of when a breakout might materialize because they start to diverge once the price begins to take off (see the following chart example).

Double bottoms buy

Double bottoms formation is the most common bullish transition type, although it is not the only one (Bollinger 2001). Usually the first low will either be in contact with the lower band or be outside the lower band. The reaction rally will carry price back inside Bollinger Bands, often tagging or exceeding the middle band in doing so. Then, the subsequent retest will occur inside the lower band. Either low can be higher or lower than the other. The important thing is that the second low occurs at or above the lower band. A stock does not have to trade beneath the lower band at the first place. Price can be nearing, but not touching the lower band on the initial low, then trading only halfway between the lower band and the middle band on the retest. Wait for a rally day with greater than average range and greater than average volume to confirm the bullish diagnosis, and then buy (Bollinger 2001). Let's take a look at the following example.

From mid of May till end of June 2004, Goodpack formed double bottoms. While the first bottom occurred beneath the lower band, the second low occurred within the lower band. On its way up after the second low, on 30 June 2005, the stock was traded with a greater than average range and a greater than average volume. This confirmed the bullish diagnosis.

Triple tops sells

Tops are quite different from bottoms. Speed, volatility, volume, and definition-all are apt to be different. Far more common are double tops. Most common of all, however, is the triple tops, and a common variation of this is the headand-shoulder tops (Bollinger 2001). The classic pattern would be a left shoulder outside the upper Bollinger Band, a head that tagged the upper band, and a right shoulder that failed well short of the upper band (Bollinger 2001). In an ideal world, the neckline would coincide with the middle band at the right shoulder, and the first decline would stop at the lower band. The throwback rally would stop at the middle band, and finally, dramatically, the first leg down would break the lower band. That is the ideal, but the odds of seeing such a pattern, perfect in every respect, are not high. Much more common would be a pattern that obeyed most of those rules, offering general guidance as the pattern unfolded. A very common variation of triple tops is three pushes to a high (Bollinger 2001). This pattern often develops as the leading edge of larger, longer top formations. Typically the first push will be outside the upper band, and the second push will make a new high and touch the upper band. The third push may make a marginal new high-more often notbut will fail to tag the band. Volume will diminish steadily across the pattern. This is a portrait of failing momentum. TIPS : A high made outside the bands followed by a new high made inside the bands is always suspect, especially if the second high fails to tag the upper band. A particularly suspicious sequence is a high made outside the upper band, a pullback, a tag of the upper band, a pullback, and then a final rally that fails to achieve the upper band at all (Bollinger 2001). Let's take a look at the following example.

Pine Agritech displayed four pushes to a high. The first, second, and third highs were outside the upper band. Thus, these first three highs were not a valid triple tops sell. The fourth high, however, failed to tag the upper band, which confirmed a triple tops sell (2-3-4). Notice that volume diminished steadily across the patterns.

Rules available in ChartNexus

Bollinger Bands - Price Below/Above The Lower/Upper Band
Price is below lower band Price is above upper band

Parameters available:
Period - period of the moving average line from where the bands are distanced apart Std Deviation - lower and upper bands will be distanced at the value of the Std Deviation from the MA line

Bollinger Bands - Price Just Touching/Crossing Band

Price just touches or crosses lower band Price just touches or crosses upper band

Parameters available:
Period - period of the moving average line from where the bands are distanced apart Std Deviation - lower and upper bands will be distanced at the value of the Std Deviation from the MA line

Bollinger Bands - Price Touched Band And Rebounded/Retreated From Band

Price rebounds from lower band

Price retreats from upper band

Parameters available:
Period - period of the moving average line from where the bands are distanced apart Std Deviation - lower and upper bands will be distanced at the value of the Std Deviation from the MA line x - the amount that price rebounds/retreats from band) x Margin - If value set to '1' means price rebounded/retreated from band within x +/- 1) t - the maximum number of days that price rebounded/retreated

Buy signal

Price is either in contact with the lower band or outside the lower band, move back inside BB (either tagging or exceeding the middle band), then move lower either in contact with the lower band or inside the lower band Price is near the lower band, but not touching the lower band, move back inside BB (either tagging or exceeding the middle band), then move lower halfway between the lower band and the middle band on the retest

Sell signal

Price move outside the upper band, move back within upper and mid bands, then make a new high which touches the upper band, move back within upper and mid bands, then either make a marginal new high or not making a new high which fails to tag the upper band A high made outside the bands, move back within upper and mid bands, then make a new high which fails to tag the upper band

References :

Bollinger, J., Bollinger on Bollinger Bands, 2001 Pring, M. J., Technical Analysis Explained, 2002

Candlestick formation
Overview
Candle charts originated in Japan several centuries ago, but have recently gained a following in other countries. Candle charts can be plotted only for markets in the opening, closing, high, and low intra-day prices are known. Candles can be used to identify price patterns as well as to construct trendline (Pring 2002).

Structure of a candle
A typical candle consists of two parts: the real body, that is, the rectangular part, and the shadow or wick, that is, the two vertical extensions. The tops and bottoms of the rectangle are determined by the opening and closing prices for the day. If the closing price ends up above the opening price, it is plotted in white. When it closes below the opening

price, it is plotted in black (see Figure 1). The thin, vertical shadow lines that protrude from the real body reflect the high and low for the day.

Since the closing and opening prices can be identical, or identical with the intra-day high or low, there are a number of possible combinations that need to be represented. Some of them are shown in Figure 2.

Identifying Short-Term Reversal

Hammers and Hanging Men (Takuri and Kubitsuri)

A hammer is an umbrella line that develops after a market decline. The color of the body is not important. A hammer is a bullish signal. In effect, it represents the kind of trading day when the price temporarily slips quite sharply, because there is a run on the selling stops. Nevertheless, the technical position is sufficiently constructive to cause buyers to come into the market and push the price back up toward or above the opening level. A hanging man is identical to a hammer, but occurs after a rally. A hanging man is a bearish signal. If a hanging man appears after a prolonged upmove, it should be treated with respect, especially if it occurs after a gap (Pring 2002).
Dark Cloud Cover (Kabuse)

A dark cloud candlestick formation consists of 2 days. The first is a strong, white real body, and the second is a black body, in which the close occurs in the lower half of the previous white real body. Its bearish connotations are most pronounced during an uptrend or in the upper part of a congestion zone (Pring 2002).
Piercing Line (Kirikorni)

It is also known as "sunny sky" because it is the exact opposite of the dark cloud and is therefore bullish. The signal is more pronounced during a downtrend or in the lower part of a congestion zone. It is important to note whether the second day's white body closes more than halfway above the previous black body. If it does not, conventional wisdom indicates that additional weakness is likely (Pring 2002).

Engulfing Pattern (Tsutsumi)

This formation develops significance after a prolonged price move (Pring 2002). A bullish engulfing pattern occurs when prices open lower than the previous day's close and then rally to close above the previous day's open. Thus, the current day's white real body "engulfs" the prior day's black real body. Note that only the real body is important in this pattern; both upper and lower shadows (i.e. vertical lines) are ignored. Bearish engulfing pattern is the opposite of the bullish engulfing pattern.

Morning Star

The morning star heralds a new day (upmove) and is bullish. It consists of two long real bodies separated by a spinning top; altogether develop overthree periods. In the first period, prices close lower than they opened, resulting in a black main body. The star is represented by a spinning top, which is made on a downside gap in the second period. The third period's body should be white and should has a closing price above the midpoint of the first period's black body (Meyers 1994, Pring 2002).
Evening Star

The evening star is a precursor of night. It has the opposite characteristics and implications of a morning star (Pring 2002). Evening star has a white body in the first period. In the second period, price opens higher, creating an upside gap and close lower after trading in a relatively narrow range (i.e. a spinning top). Finally, in the third period, price continues to move lower and close below the midpoint of the first period's white main body (Meyers 1994).

Doji Star

A doji star is a bearish sign and occurs after a lengthy rally (Pring 2002). It occurs when price gap to the upside on the open, and then close at the same price as the opening price (Meyers 1994).

Shooting Star

A shooting star is like a short-term top where the daily price action experiences a small gap and the black real body appears at the end of a long wick or upper shadows (Pring 2002).

Upside Gap Two Crows (Narabi Kuro)

This bearish formation consists of a long white body followed by two black bodies. The first black body gaps to the upside of the long white body. The third black body often closes the gap (Pring 2002).

Three Black Crows (Samba Garasu)

The three black crows pattern consists of three declining black candlesticks that form after an advance. They indicate lower prices. Each black candles should open within the real body of its black predecessor and close at or close to its session low (Pring 2002).

Tweezer Tops and Bottoms (Kenuki)

A tweezer top consists of two candles with an identical high. Actually, it is possible for a tweezer to consist of more than 2 days with an identical high. This pattern is short-term bearish because the first day's high acts as resistance; when the second day is unable to break through the first day's high, it indicates a loss of upside momentum. A tweezer bottom occurs when, after a decline, two or more candles make an identical low. This is a short-term bullish, indicating a loss of downside momentum since the price finds support in the area of the low. One factor that will increase the significance of a tweezer is the nature of the pattern being formed, e.g. engulfing pattern, hammer, hanging man, etc (Pring 2002).

Belt-Hold Lines (Yorikiri)

A bullish belt-hold is a one candle pattern consisting of a long candle in which the price opens on the intra-day low and then works its way higher throughout the session. The price does not have to close at the high, but the longer the real body, the more positive the candle. Also, if a belt-hold has not appeared on the chart for quite a while, it is therefore an unusual phenomenon. As a result, it gains in importance. This is because traders are making a very strong statement about their feelings towards the market with a belt-hold compared to the smaller candles that were previously a norm. Just think of a crowd murmuring, and then a loud voice comes from within the crowd. It is obviously a person who wants to be heard. The belt-hold following a long period of smaller candles amounts to the same thing. It is a one-day pattern that says loudly, "Listen to me because I am telling you, the short-term trend has changed" (Pring 2002). A bearish belt-hold is the opposite.

Counterattack or Meeting Lines (Deai Sen/Gyakushu Sen)

A bullish counterattack develops when, after a decline, a black candle is followed by a white candle and both close or "meet" at the same level. The first day is usually a long black candle. The second day opens sharply lower, leading most traders to believe prices will continue to give way. However, by the end of the day, the price has regained everything lost (a counterattack by the buyers) and closes unchanged. The meeting line therefore indicates that the downside momentum has probably dissipated and a reversal in trend is likely (Pring 2002). A bearish counterattack or meeting line is formed when after an advance, a white candle is followed by a black candle and both close at the same level (Pring 2002). More specific rules for identifying these patterns are as follows:

The first day is colored in the direction of the prevailing trend and the second day forms in the opposite color Both real bodies extend the prevailing trend and are long The closing prices are identical

Identifying Continuation Formations

Upside Gap (Tasuki)

A tasuki gap occurs after an advance (Pring 2002). An upside tasuki gap pattern develops over three periods. In the first period, price closes above its opening price, resulting in a white real body. In the second period, price gaps to the upside on the open and then close higher, creating a white real body. In the third period, price opens within the real body of the second period and then close lower, but do not fill the gap (with either the real body or the lower shadow). This suggests that only a temporary setback has occurred and that prices will continue higher (in essence, because the gap has acted as a support level) (Meyers 1994).

Windows (Ku)

Japanese chartists refer to gaps (areas on a chart where no actual trading takes place) as windows. Windows therefore have the same technical implications as gaps (Pring 2002). Gaps frequently act as support or resistance. An upside window is considered to be bullish, while a downside window is viewed as bearish.

Harami Lines (Yose)

Harami formation is similar to the consolidation trendline break in that it indicates a loss of momentum. The main difference is that harami lines are of much shorter duration and consist of 2 days' price action. The second one, the harami, forms a real body that is sufficiently small to be engulfed by the prior day's long real body. If the harami is also a doji, it is called harami cross (Pring 2002). After a sharp rally or reactions, these patterns indicate a balance between buyers and sellers after one or the other has predominated. This means that harami often warn of an impending trend change. In some instances, this will be from up or down to sideways and in others an actual reversal (Pring 2002).

Tweezer Tops and Bottoms (Kenuki)

These formations are very similar in concept to a flag formation, except that they take only a few days, not weeks, to develop. The rising three method is a bullish pattern and consists of a powerful white body followed by a series of three or four declining small black bodies. These bodies should be accompanied by a noticeable contraction in volume that a very fine balance is developing between buyers and sellers. The final part of the pattern is a very strong white body that takes the price to a new closing high. This final day should record a significant increase in activity (Pring 2002). The bearish falling three method is exactly the opposite except that volume characteristics are of no significance on the last day (Pring 2002).

Example

After a retracement, SembMar exhibited a Bullish Harami Cross pattern. This signaled a possible short-term reversal. However, on the third day after the shooting star was formed, the prices then started to decline. During the downward price movement, an inverted hammer was observed which signaled a possible trend reversal.

Guppy Multiple Moving Average (GMMA)

Overview
Developed by Darryl Guppy, Guppy Multiple Moving Average (GMMA) are sets of moving averages where each of the set of moving averages represents different time frames. The sets of moving averages are overlayed on one chart. For more in-depth and detailed information, please check out the book by Darryl Guppy - Trend Trading or visit his website. It comprises of a shorter-term moving averages set of between 3 and 15 periods. Another set is the longer term set made up of longer term averages between 30 and 60 periods. When used in combination, they allow us to analyse short-term price action in the broader context of long term price action. GMMAs is useful for :

identifying points where market (short and long term groups) comes to an agreement monitoring established trends and to use it to time market entry when there is a short-term pullback

NOTE: As with all indicators, you may need to tweak this indicator by adjusting the sets of exponential moving averages to fit your own timeframe.

How it is calculated
Short Term Group : 3, 5, 8, 10, 12 and 15 period Long Term Group : 30, 35, 40, 45, 50 and 60 period NOTE: All averages are calculated as exponential moving averages Quoted from Darryl (via email): "There is no mid term group of averages as these do not provide any significant advantage in understanding the behaviour of traders or investors in the market. Additionally, the use of such a mid term group obscures the volatility clustering behaviour and makes it more difficult to quickly understand the degree of fractal repetition which is occurring cross multiple time frames."

Example

Rules available in ChartNexus

GMMA Crossover
Bullish crossover of the EMA lines Bearish crossover of the EMA lines

Parameters available:

Black Window - the time frame where the EMA lines may cross many times without affecting the triggering of the stock t1 - the minimum number of days that the EMA lines must not cross before the Black Window t2 - the minimum number of days that the EMA lines must not cross after the Black Window

GMMA trend outlook

GMMA shows trend is bullish with short- over mid- over long-term EMAs GMMA shows trend is bearish with long- over mid- over short-term EMAs

Momentum
Overview
Momentum measures the rate of the rise or fall in stock prices. It measures the amount that a security's price has changed over a given time span (Achelis 1995). From the standpoint of trending, momentum is a very useful indicator of prices' strength or weakness. History has shown us that momentum is far more useful during rising markets than during falling markets. In other words, bull markets tend to last longer than bear markets.

How it is calculated
Momentum indicator is the ratio of today's price compared to the price n-periods ago.

How to interpret
The interpretation of Momentum indicator is similar to the interpretation of the Price Rate of Change (ROC). While both indicators display the rate of change of a security's price, ROC displays the rate of change as a percentage, whereas Momentum indicator displays the rate of change as a ratio.

Trend Follower
Buy when the indicator bottoms and turns up, and sell when the indicators peaks and turns down (Achelis 1995). If Momentum indicator reaches extremely high or low values (relative to its historical values), there may be a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume that process will probably go still higher. In either case, trade only after price confirms the signal generated by the Momentum indicator.

Divergence

Assumptions: market tops are typically identified by a rapid price increase and market bottoms typically end with rapid price declines (Achelis 1995). A bullish divergence occurs when price makes a low, then corrects moving higher, and subsequently, reaches a lower low. At the same time, Momentum indicator makes a low followed by a higher low. A bearish divergence occurs when price makes a high, then corrects moving lower, and subsequently, reaches a higher high. At the same time, Momentum indicator makes a high followed by a lower high.

Trend Reversal
Normally, a reversal in the momentum trend acts as confirming evidence of a price trend reverse signal. In effect, this momentum signal performs the act of supplementary "witness" in our weight of the evidence approach. The actual buy and sell signals can only come from a reversal in trend of the actual price, not the momentum series (Pring 2002).

Example
We purposely choose the same example for ROC and Momentum to show the similarity of the two indicators. Investors can choose to use either one.

In the above chart, Ascott displayed two bearish divergence: while prices were making a higher high, Momentum indicator formed a lower high. The first divergence led to declining prices for almost three months; whereas the second divergence resulted in short-term price weaknesses.

BUY Signal

The indicator bottoms The indicator bottoms and turns up The indicator reaches extremely high values (relative to its historical values) and then turns down

Positive divergence The indicator reverses its downtrend and is trending up The indicator is crossing up the 0 level

SELL Signal

The indicators peaks The indicators peaks and turns down The indicator reaches extremely low values (relative to its historical values) and then turns up Negative divergence The indicator reverses its uptrend and is trending down The indicator is crossing down the 0 level

Money Flow Index (MFI)

Overview
While OBV looks solely at the flow of up- and down- volumes in and out of a security, Money Flow Index (MFI) also takes into account the actual price change and hence measures the strength of money flowing into and out of the security. MFI works on the concept that a price change based on a small volume traded is not as significant as the same price change but based on a much bigger volume. Thus, it is conceptually similar to RSI as it is a momentum indicator that measures a security's inherent strength or weakness.

How it is calculated
MFI divides the money flow into a security into positive money flow and negative money flow. If typical price today is greater than yesterday, it is considered positive money.

During a period that the price of the security goes up, the multiplication of the volume and the price gives the positive money flow whereas a drop in price leads to negative money flow. MFI compares the ratio of positive money flow and negative money flow. For a 14-day average, the sum of all positive money for those 14 days is the positive money flow.

MFI gives a good indication on the buying and selling pressure on the security.

How to interpret
Overbought and Oversold
As any other oscillator, MFI does not grow indefinitely but oscillates between two boundaries namely 0 and 100. Generally, MFI that falls below 80 indicates overbought (bearish signal). Conversely, MFI that rises above 20 indicates oversold (bullish signal).

Divergence
Divergence between prices and MFI suggests that prices will be reversing. If prices are rising and MFI is decreasing (negative divergence), look for a turn downward in process. This is because a declining MFI suggests that there is greater volume associated with money flowing out from the stock than money flowing into the stock. If prices are declining and MFI is increasing (positive divergence), expect prices to turn and move higher. Divergences that occur after an overbought or oversold reading usually provide more reliable signals.

Example

The MFI of Pearl Energy displayed overbought on 10 June and 18 July 2005. Afterwards, short-term price weaknesses were observed. On 8 September 2005, when price declined, MFI increases, thus indicating bullish divergence. There was greater volume associated with money flowing into the stock than money flowing out from the stock. Notice that prices were trending up soon afterwards.

Rules available in ChartNexus

MFI Touched And Rebounded/Retreated From Limit

MFI rebounding from lower limit to XX MFI retreating from upper limit to XX

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI Limit Margin - if value sets to '''1' means RSI touched and rebounded/retreated from limit +/- 1 x - the amount that MFI rebounded/retreated from limit x Margin - if value sets to '''3' means MFI rebounded/retreated within x +/- 3 t - the maximum number of days for the rebound/retreat to happen

MFI Crossing Limit

MFI at XX is in oversold region MFI at XX is in overbought region

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI

MFI Limit Exceeded

MFI at XX is in oversold region MFI at XX is in overbought region

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI

MFI Rebounding/Retreating In Oversold/Overbought Region

MFI rebounds from low in oversold region MFI retreats from high in overbought region

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI x - the amount that MFI rebounded/retreated from limit t - the maximum number of days for the rebound/retreat to happen

MFI Rebounded/Retreated In Oversold/Overbought Region And Touching/Crossing Limit

MFI crosses back lower limit from oversold region

MFI crosses back upper limit from overbought region

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI x - the amount that MFI rebounded/retreated from limit x Margin - if value sets to '''3' means MFI rebounded/retreated within x +/- 3 t - the maximum number of days for the rebound/retreat to happen

MFI In Specified Range

MFI at XX is in range (min, max)

Parameters available:
Period - period of MFI Min - minimum value of the range Max - maximum value of the range

MFI Crossed 50% level

MFI crossed up 50% level MFI crossed down 50% level

Parameters available:
Period - period of MFI Cross Value - the level MFI must cross

MFI Failure Swing

MFI bottom failure swing MFI top failure swing

Parameters available:
Period - period of MFI Lower Limit - lower limit of MFI Upper Limit - upper limit of MFI x1 - the minimun amount below/above the recent peak/trough x2 - the minimum amount MFI has moved above/below the recent peak/trough

MFI Divergence With Price

MFI is increasing with price still moving down MFI is decreasing with price still moving up

Parameters available:

Max Divergence Days - the maximum number of days during which the divergence occurs Min Divergence Days - the minimum number of days during which the divergence occurs Min Overlap Length - the minimum number of overlapping days during which price and MFI diverge Price Slope - the minimum slope of the moving average of the price MFI Slope - the minimum slope of the moving average of MFI Price MA Period - the number of days used for the period of the moving average of the price MFI MA Period - the number of days used for the period of the moving average of the MFI MFI On Right - if value set to '''YES''', only divergences with MFI slope on the right side of price slope are triggered

MFI Convergence With Price

MFI is increasing with price moving up MFI is decreasing with price moving down

Parameters available:
Max Convergence Days - the maximum number of days during which the convergence occurs Min Convergence Days - the minimum number of days during which the convergence occurs Min Overlap Length - the minimum number of overlapping days during which price and MFI diverge Price Slope - the minimum slope of the moving average of the price MFI Slope - the minimum slope of the moving average of MFI Price MA Period - the number of days used for the period of the moving average of the price MFI MA Period - the number of days used for the period of the moving average of the MFI MFI On Right - if value set to '''YES''', only convergences with MFI slope on the right side of price slope are triggered

MFI Trend
MFI is trending upwards MFI is trending downwards

Parameters available:
t - the number of days that MFI has been trending Slope - the slope of the MFI when it is trending

Moving Average (MA)

Overview
Due to traders' frequent change of sentiment, positional plays and profit taking, the price of a security swings wildly over time. This results in a sometimes-difficult interpretation of the actual price trend of the security. Moving Average (MA) attempts to tone down the fluctuations of stock prices into a smoothed trend - without compromising the overall direction of the price movement-so that distortions are reduced to a minimum. Four MA are used in the technical analysis: simple, weighted, exponential, dual, and Guppy Multiple MA (GMMA). Another important MA is MA Envelopes.

How it is calculated
Simple MA
Simple MA is a mean average, which is constructed by totaling a set of closing prices and dividing that total by the number of observations (Pring 1985). A 20-day simple MA is calculated by:

In order to get the average to "move", a new closing price is added (in this example, the closing price of day 21) and the first closing price on the list is subtracted. The new total is then divided by 20 and the process repeats perpetually. Simple MA assumes equal weight for each of the days under consideration. In other words, it assumes that the price at the beginning of the period affects the moving average by the same factor as the most recent one. This may not be accurate as we expect the most recent prices to have more weighting as compared to older ones.

Weighted MA
Weighted MA aims to improve the possible drawback of simple MA by giving more weight to prices from the most recent observations. There are almost limitless ways in which the data can be weighted. The most common method to calculate a 20-day weighted MA, for instance, is:

Another method is to calculate a simple MA but in doing so to use the most recent observation twice, thereby doubling its weight (Pring 1985).

Exponential MA
An exponential MA is a shortcut to obtain a form of weighted MA, since an exponential smoothing also gives greater weight to more recent data. In order to construct 20-day exponential MA, for example, the following formula is followed:

Dual MA
Dual MA basically plots one short-term simple MA side-by-side with another longer-term simple MA, for example, a 12-day MA and a 26-day MA (see chart below). This procedure has the advantage of smoothing the data twice and thereby, reducing the possibility of a whipsaw.

Guppy Multiple MA (GMMA)

GMMA plots multiple short-term simple MA (e.g. 3-day MA, 5-day MA and 7-day MA) with multiple medium-term simple MA (e.g. 9-day MA, 11-day MA, 13-day MA and 14-day MA), and multiple long-term simple MA (e.g. 30-day MA, 35-day MA, 40-day MA, 45-day MA and 50-day MA). Example is shown in the chart above.

MA Envelope
MA Envelope is based on the principle that stock prices fluctuate around a given trend in cyclical movements of reasonable similar proportion (Pring 1985). In other words, just as MA serves as an important juncture point, so do certain lines drawn parallel to that MA (an envelope). The envelope consists of the points of maximum and minimum divergence from the center of the trend. There is no fixed rule about the exact position at which the envelope should be drawn, since it can only be discovered on a trial-and-error basis with regard to the volatility of the index being monitored and the time span of the MA. Below is an example of MA Envelope. In this example, MA Envelope is plotted at 10% intervals of the 20-day MA, i.e. at 18-day and 20-day MA.

How to interpret
Support and Resistance Levels
Since MA is a smoothed version of a trend, the average itself becomes an area of support and resistance. In a rising market, stock prices often finds support at the MA level and turns up. Similarly, a rally in declining market often meets resistance at MA and turns down (Pring 1985).

Trend Reversal
Changes in the trend of the stock being measured are identified not by a change in the direction of the MA, but by a crossover of the MA by the index itself. A change from a rising to a declining market is signaled when prices move below its MA. In similar fashion, a change from a declining to a rising market is signaled when prices move above its MA. If the cross-above or cross-below occurs while MA is flat or has already changed direction, it is a fairly conclusive proof that the previous trend has been reversed. If the cross-above or cross-below occurs while MA is still proceeding in the direction of the prevailing trend, this development should be treated as a preliminary warning that a trend reversal has taken place. Confirmation should await a flattening or a change in direction in the MA itself or should be sought from alternative technical indicators. Generally speaking, the longer the time span covered by MA, the greater is the significance of a crossover signal. Nonetheless, only an MA that can catch the movement of the actual cycle will provide the optimum tradeoff between lateness and oversensitivity. The above interpretation is the interpretation of a simple MA. In the case of a more sensitive weighted MA or exponential MA, a warning of a trend reversal is given by a change in direction of the average rather than a crossover.

For Dual MA, a bullish signal is given when the shorter-term MA moves above the longer-term MA. In the same vein, a bearish signal occurs when the shorter-term MA moves below the longer-term MA. In GMMA, a strong bullish signal is given when the short-term MA moves above the medium-term MA and the medium-term MA moves above the long-term MA. A strong bearish signal is when the short-term MA moves below the medium-term MA and the medium-term MA moves below the long-term MA. Another way to identify a turning point is by looking at the MA envelope. The movements outside the envelopes would be seen as overextended.

Example

Creative experienced several cross-above its downtrend MA. Notice that in general, GMMA did not confirm any change of directions, which means that the cross-above signals were false signals.

Singtel was generally experiencing an upward movement since September 2004 (except between end of March and mid May, where it experienced short-term price weaknesses). On 5 August 2005, the price made a sudden drop and short-term GMMA moved below medium-term GMMA. However, looking at Dual MA, the shorter-term MA (MA(12)) had not crossed below the longer-term MA (MA(26)). On 15 August 2005, MA(12) finally crossed below the MA(26). This was followed by a strong bearish signal of the GMMA, which confirmed the trend reversal.

The chart for Creative shows 10% envelopes placed around a 20-day MA. Notice that during the downtrend, the upper envelope was almost never touched, while the lower envelope was touched repeatedly. Moves outside of the envelopes were seen as overextended and were significant for short-term traders who are more concerned with smaller price fluctuations.

Moving-Average Convergence Divergence (MACD)

Overview
Moving-Average Convergence Divergence (MACD) was developed by Gerald Appel in the 1960s. Since it is constructed from Moving Average (MA), it inherits the trend-following property of MA. Consequently MACD works best in trending markets and performs poorly during sideways trading. MACD gets its name from the fact that the shorter MA is continually converging toward and diverging from the longer term-one. Like MA, MACD is a trend-following indicator that simply tell you what the prices are doing (i.e. rising or falling) so that you can invest accordingly. Trend indicators have you buy and sell late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the right side of the market (Achelis 1995).

How it is calculated
MACD is an oscillator constructed from the division of one MA by another. The two MAs are usually calculated on an exponential basis in which the more recent periods are more heavily weighted than in the case of a simple MA (Pring 1991). A typical combination used by Appel is the 26-period exponential MA with the 12-period exponential MA. The MACD line is calculated by subtracting the longer period moving average from the shorter period moving average. This creates a momentum oscillator whose values oscillate around the horizontal equilibrium line (zero-line) which represents the points at which the two MAs are having the same value. Ironically the default time span used for daily charts (26/12 with a 9-day signal line) appears to work better on monthly ones because it manages to retain the primary trend swings yet the signal line whipsaw crossovers are kept to a minimum (Pring 2002). When the indicator moves through this line, it means that the shorter-term MA is crossing the longer-term MA. Plots below the horizontal line indicate when the shorter-term MA is below the longer-term MA and vice versa.

How to interpret
Divergence Analysis
A bearish divergence occurs when price advances or moves sideways and MACD line declines. The negative divergence in MACD can take the form of either a lower high or a straight decline. A bullish divergence occurs when price declines or moves sideways and MACD line moves up. The positive divergence in MACD can take the form of either a higher low or a straight incline.

Bearish/Bullish MA Crossover
A bearish MA crossover occurs when MACD line crosses below the signal line; whereas a bullish MA crossover occurs when MACD line crosses above the signal line. Not only are these crossovers are the most common ones, but they also produce the most false signals. As such, they should be confirmed with other indicators to avoid whipsaws and false readings.

Bearish/Bullish Centerline Crossover

A bearish centerline crossover occurs when MACD moves below zero and into negative territory, creating a plot below the equilibrium line. This is a clear indication that momentum, at least for the short term, has changed from bullish to bearish. A bullish centerline crossover occurs when MACD moves above zero and into positive territory, creating a plot above the equilibrium line. This is a clear indication that momentum, at least for the short term, has changed from bearish to bullish.

The centerline crossover can act as an independent signal, or confirm a prior signal such as divergence and MA crossover (Pring 1991).

Example

Looking at the MACD indicator of SembMar, there were a lot of bullish and bearish crossovers. To avoid whipsaws and false readings, they should be confirmed with other indicators. In this example, when we look at GMMA, it seemed to suggest an uptrend. Without confirmation, the crossovers were merely whipsaws. On 6 July, 10 August and 5 September 2005, while prices were rallying higher highs, MACD line formed lower highs. To confirm that this was a bearish divergence, one should check for any centerline crossovers or check what the other indicators were telling. In this case, GMMA was still suggesting an uptrend. Indeed on 23 September 2005, SembMar climbed to another new high.

Price And Volume Trend (PVT)

Overview
The Price and Volume Trend (PVT) is similar to OBV. It is a cumulative total of volume that is adjusted depending on changes in closing prices. But, OBV adds all volume on days when prices close higher and subtract all volumes on days when prices close lower. PVT on the other hand, adds/subtracts only a portion of the daily volume. The amount of volume added to PVT is determined by the amount that prices rose or fell relative to the previous day's close (Achelis 1995). Because of their differences, many investors feel that PVT more accurately illustrates the flow of money into and out of a security than does OBV.

How it is calculated
Today's PVT is calculated by:

How to interpret
The interpretation of PVT is similar to the interpretation of A/D lines.

Divergence
A bullish divergence occurs when price makes a low, then corrects moving higher, and subsequently, reaches a lower low. At the same time, PVT makes a low followed by a higher low. A bearish divergence occurs when price makes a high, then corrects moving lower, and subsequently, reaches a higher high. At the same time, PVT makes a high followed by a lower high.

Example

China Petro made a high, pullback, then moved to a higher high on 14 July 2005. At the same time, PVT formed a lower high. This bearish divergence was followed by a strong price decrease.

BUY

Positive divergence Confirmation: price makes a high, then corrects moving lower, & subsequently reaches a higher high. At the same time, PVT makes a high followed by a higher high.

SELL

Negative divergence Confirmation: price makes a low, then corrects moving higher, & subsequently reaches a lower low. At the same time, PVT makes a low followed by a lower low.

Relative Strength Index (RSI)

Overview

Relative Strength Index (RSI) is a price momentum indicator introduced in 1978 by J. Welles Wilder. RSI measures the velocity at which prices are moving (Meyers 1994). RSI was intentionally designed to address the erratic movement flaw often associated with momentum indicator (Pring 2002). For example, if one has a 20-day oscillator and 20 days ago the price moved up or down dramatically, the current reading will be a misleading low or high reading. The RSI formula attempts to smooth out such distortions. Don't confuse RSI with relative strength analysis! While RSI measures the internal strength of a particular security, relative strength analysis compares the performance of two items, such as one stock with another or one stock with an overall market index.

How it is calculated
RSI compares the days that the price of a security ends higher with those days where the price ends lower for a specified period of time. It is modeled simply by the following equation:

Timespan
Wilder (1978) suggests the use of 14 days of data in the RSI calculation on the basis that it is half of the 28-day lunar cycle (Pring 2002). This produces a smooth and sensitive oscillator for medium term trading. If an investor is looking at a very short-term basis, a shorter term RSI (9 days) can be used to produce more responsive signals--although the oscillator swings will be more pronounced. In general, the greater the number of time periods is used, the more stable the RSI is, and the fewer signals are generated. Short-term RSI tends to produce more signals than longer-term RSI, including more false signals (Meyers 1994). Nevertheless, shorter-term time spans are more suitable for pointing out overbought and oversold conditions; whereas longer-term spans lend themselves better to the purpose of constructing trendlines and price patterns (Pring 2002). TIPS : For daily data, investors can use 9-, 14- 25-, 30-, and 45-day spans. For weekly data, the calendar quarters operate effectively, so 13-, 26-, 39-, and 52-week spans can be adopted. As for monthly charts, 9-, 12-, 18-, and 24month spans are recommended. For longer-term charts, covering perhaps 2 years of weekly data, a time span of about 8 weeks offers enough information to identify intermediate-term turning points. Finally, very long term charts, going back 10 to 20 years, seem to respond well to a 12-month time span (Pring 2002).

How to interpret
Overbought And Oversold
Wilder (1978) recommends using levels of 70 and 30 to indicate overbought and oversold respectively. Generally, if RSI falls below 70, it is a bearish signal. Conversely, if RSI rises above 30, it is a bullish signal.

However as a momentum indicator, RSI is expected to trend at high values in a bullish market and at low values during a bearish market. Therefore in a bullish or bearish market, a better level for an overbought or oversold signal is 80 and 20 respectively. Moreover, we should remember that the longer the time span, the narrower the RSI overbought and oversold lines should be constructed and vice versa. Consequently, the 70/30 combination is inappropriate when the time span differs appreciably in either direction from the standard 14-day period. For instance, an 80/20 combination may give a much better feel for the overbought/oversold extreme than the 70/30 default value for a 9-day RSI. This is due to the fact that shorter time spans result in wider RSI oscillations. In contrast, due to the shallower swings, a 65/35 combination may give a much better feel for the overbought/oversold extreme than the 70/30 default value for a 65day RSI. Some traders identify the long-term bullish trend and then use oversold readings for entry points. The rationale is that if a downside breakout takes place in a bull trends (contra-trend manner), it is not likely to hold because RSI does not have much potential to remain oversold (Pring 2004). In other words, if the long-term trend is bullish, then oversold readings could mark potential entry points. However, since it reverses on a dime, investor would have had to be extremely nimble to make much of a profit. A protective stop should have been placed above the point where the probabilities favored the pattern is no longer having any downside influence on the price. This is because contratrend breakouts do not always result in whipsaws. TIPS #1 : A simple but effective method of interpreting RSI is to buy on crossing up through the 50 level and sell on the crossing down through the 50 level (Meyers 1994) TIPS #2 : To isolate major buy candidates, remember that the best opportunities lie where long-term momentum, such as a 12-month RSI, is oversold. If you can also identify an intermediate- and a short-term oversold conditions, all three trends (primary, intermediate-term, and short-term) are then in a classic conjunction to give a high probability buy signal (Pring 2002). NOTE : An overbought/oversold reading merely indicates that, in terms of probabilities, a counterreaction is overdone or overdue. It represents an opportunity to consider liquidation or acquisition, but NOT an actual buy or sell signal. This can come ONLY when the price series itself gives a trend-reversal signal (Pring 2002)

Divergence
Divergence between prices and RSI suggests that prices will be reversing. If prices are rising or flat and RSI is decreasing (negative divergence), look for a turn downward in process. On the other hand, if prices are declining or flat and RSI is increasing (positive divergence), expect prices to turn and move higher. Divergences that occur after an overbought or oversold reading usually provide more reliable signals.

Failure Swings
Failure swings can also be used in the interpretation of RSI. A top failure swing occurs when RSI rises above 70, declines to a lower level, rises again failing to reach the 70 level, and then falls below the prior lower level. One would sell at that point. A bottom failure swing occurs when RSI falls below 30, rises to a higher level, falls again failing to reach the 30 level, and then rises below the prior higher level. One would buy at that point (Meyers 1994).

Example

CapitaLand has been displaying an uptrend since mid of May 2004. From the above chart, there were two times when CapitaLand showed downside breakouts during its bullish trend. The first one was on mid of December 2004, and was accompanied by a negative divergence (i.e. when prices reached higher highs, RSI showed lower highs). Considering that CapitaLand had been displaying a bullish trend for six months at the time when the downside breakout occurred, this could be a good entry point. The second downside breakout was on end of March till early April 2005. Prior to the downside breakout, a negative divergence occurred. If a short trade had been initiated in the breakout, a protective stop should have been placed. On May 2005, RSI confirmed a bearish sentiment towards CapitaLand. From the chart, following this sentiment, prices moved sideways. Applying the tips to buy when RSI crossed up the 50 level would only be a wise decision if the other indicators signaled a comeback. As shown in the chart, after sideways price movements for more than 2 months, CapitaLand fought back hard (as indicated by the drastic increase in volume) to resume its uptrend line.

Buy signal

Confirmation: price makes a high, then corrects moving lower, & subsequently reaches a higher high. At the same time, RSI makes a high followed by a higher high.

Sell signal

Confirmation: price makes a low, then corrects moving higher, & subsequently reaches a lower low. At the same time, RSI makes a low followed by a lower low.

Stochastics
Overview

George Lane observed that for a specified period, as prices increase, closing prices have a tendency to be ever nearer to the highs of the period. Similarly, as prices move lower, closing prices tend to be closer and closer to the lows for the period. In the late 1950s, he developed a price velocity technique to determine the relationship between the closing price of a security and its price range over a defined period of time (e.g. 5 days). This technique is known as Stochastics. Stochastics is a momentum indicator and its value oscillates between 0 and 100. In an up market, Stochastics value increases towards 100 and conversely goes down in a down market. With the definition of upper and lower levels, overbought and oversold signals are generated when the indicator extends beyond these levels.

How it is calculated
Stochastics consists of 2 parameters which are %K and %D. The value of %K is ranging from 0 to 100 depends on how high is the recent closing price with respect to the highest and lowest price attained during the specified period. %D is obtained by taking a moving average of %K. The formulas for the two parameters are shown below:

The recommended N is from 5 to 21 periods (Meyers 1994). The %K and %D discussed so far are specifically referred to as fast Stochastics as the two parameters labeled %K fast and %D fast respond very rapidly to market changes. This may generate several misleading signals. A smoother version is obtained by taking a 3-period moving average of both the %K fast and %D fast. The new parameters obtained are known as slow Stochastics. NOTE : A close examination of the fast and slow Stochastics reveals that the %D fast becomes the %K slow.

How to interpret
Extreme Readings
It is not unusual for stochastics to reach 0% or 100%. These readings do not mean that the price of a particular stock has reached a bottom (0%) or top (100%). However, it does suggest great weakness (0%) or strength (100%). When a reading of 0% is reached, stochastics frequently moves up to the 20-25% level and then declines again to or near the 0% level. When stochastics moves up from that area, a minor rally in prices may occur. The opposite holds for 100% readings (Meyers 1994).

Bearish/Bullish Stochastic Crossover

Bearish stochastic crossover is when %D fast moves below %D slow. In contrast, bullish stochastic crossover is when %D fast moves above %D slow. Bearish/bullish stochastic crossovers act as confirmations to bearish/bullish divergence.

Divergence Analysis

A bearish divergence occurs when price makes a high, then corrects moving lower, and subsequently, reaches a higher high. At the same time, corresponding peaks of the %D lines (%D fast and %D slow) make a high followed by a lower high. Confirmation and signal to sell occurs when there is a bearish stochastic crossover. See example below:

When price made a higher high on 17 January 2005, Hongguo's stochastics made a lower high, thus indicating bearish divergence. The divergence was confirmed soon afterwards when %D fast moved below %D slow. Following which, Hongguo's prices were trending down. A bullish divergence occurs when price makes a low, then corrects moving higher, and subsequently, reaches a lower low. At the same time, corresponding peaks of the %D lines (%D fast and %D slow) make a low followed by a higher low. Confirmation and signal to sell occurs when there is a bullish stochastic crossover. See example below:

Pearl Energy had been declining since it mad a double top formation in early August 2005. On 8 September 2005, when price made a lower low, stochastics made a higher low, thus indicating bullish divergence. The divergence was confirmed when %D fast moved above %D slow. Notice that prices were trending up soon afterwards. TIPS : A simple but effective method of interpreting RSI is to buy on crossing up through the 50 level and sell on the crossing down through the 50 level (Meyers 1994)

Rules available in ChartNexus

Stochastics Crossover
%D crosses over smoothed %D Smoothed %D crosses over %D

Parameters available:
Lower Limit - lower limit of stochastics Upper Limit - uper limit of stochastics %K Period - the period of %K %D Period - the period of %D Smoothed %D Period - the period of smoothed %D period x - the minimum distance between the %D line and smoothed %D line t - the maximum number of days that x occurs

Stochastics Divergence With Price

Stochastics is increasing with price still moving down Stochastics is decreasing with price still moving up

Parameters available:
Max Divergence Days - the maximum number of days during which the divergence occurs Min Divergence Days - the minimum number of days during which the divergence occurs Min Overlap Length - the minimum number of overlapping days during which price and stochastics diverge Price Slope - the minimum slope of the moving average of the price Stochastics Slope - the minimum slope of the moving average of stochastics Price MA Period - the number of days used for the period of the moving average of the price Stochastics MA Period - the number of days used for the period of the moving average of the stochastics Stochastics On Right - if value is set to YES , only divergences with stochastics slope on the right side of price slope are triggered

Stochastics Convergence With Price

Stochastics is increasing with price moving up Stochastics is decreasing with price moving down

Parameters available:
Max Convergence Days - the maximum number of days during which the convergence occurs Min Convergence Days - the minimum number of days during which the convergence occurs Min Overlap Length - the minimum number of overlapping days during which price and stochastics converge

Price Slope - the minimum slope of the moving average of the price Stochastics Slope - the minimum slope of the moving average of stochastics Price MA Period - the number of days used for the period of the moving average of the price Stochastics MA Period - the number of days used for the period of the moving average of the stochastics

Stochastics On Right - if value is set to YES , only convergences with stochastics slope on the right side of price slope are triggered

Buy signal

Confirmation: price makes a high, then corrects moving lower, & subsequently reaches a higher high. At the same time, %D makes a high followed by a higher high. %K has been moving in one direction for many periods & suddenly reverses direction sharply (e.g. for 212%)

Sell signal

Confirmation: price makes a low, then corrects moving higher, & subsequently reaches a lower low. At the same time, %D makes a low followed by a lower low. %K has been moving in one direction for many periods & suddenly reverses direction sharply (e.g. for 212%)

Williams' %R
Overview
Developed by Larry Williams, Williams' %R is a momentum indicator that measures overbought/oversold levels (Achelis 1995).

How it is calculated
As Williams %R works much like the Stochastic oscillator, the formula used to calculate Williams' %R is similar to Stochastics oscillator, but not the same:

Compared to Stochastics, Williams' %R is plotted on an upside-down scale (the multiplier is -100 instead of 100). Another different is that Stochastics has internal smoothing, but Williams' %R does not have one. The chart below clearly depicts the similarities and differences between Williams' %R and Stochastic.

Typically, Williams' %R is calculated using 14 periods. However, the timeframe and number of periods may vary according to the desired sensitivity and the characteristics of the security.

How to interpret
Extreme Readings
As it is not unusual for stochastics to reach 0% or 100%, it is also not unusual for Williams' %R to reach -100 or 0. These readings do not mean that the price of a particular stock has reached a bottom or top. However, it does suggest great weakness (-100) or strength (0). As with all Overbought/Oversold indicators, it is best to wait for the security's price to change direction before placing your trades. If Williams' %R is showing an Overbought condition, it is wise to wait for the security's price to turn down before selling the security. The MACD is a good indicator to monitor change in a security's price. NOTE : It is not unusual for Overbought/Oversold indicators to remain in an Overbought/Oversold condition for a long time period as the security's price continues to climb/fall. Selling simply because the security appears Overbought may take you out of the security long before its price shows signs of deterioration (Achelis 1995).

Example

While Williams' %R stayed in the Overbought level from 13 June to 4 July 2005, SATSvc prices were generally remained uptrend. At the same time, MACD line remained above the signal line, suggesting bullish sentiments. Thus, selling simply because SATSvc appeared Overbought on mid of June 2005 would take investors out of the stock long before prices showed signs of deterioration. Notice that after trending up, prices moved sideways. During this time, MACD line crossed below the signal line, suggesting bearish crossover. Following which, prices displayed short-term weaknesses and Williams' %R crossed down, reaching an Oversold level. Finally, prices picked up again, Williams' %R reached and stayed at the Overbought condition again and MACD made a bullish crossover. An important point to note here is that during this time, MACD stayed above the zero line, indicating underlying bullish sentiments.