Invest Without Emotions
The markets open up 1.2%
12pm (+0.8%): The RBI pauses and actually signals that it is going cut rates going forward.
1pm: The market trends higher (+1.2%). Looking good so far…
2pm: softening up a bit, but still +0.6%.
And it closes down 2%
This is one bipolar market.
This is a review of the 10th chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
Oscillators are extremely useful in non-trending markets and can be used to detect short-term market extremes in trending markets as well. They are most useful when:
The CCI is an index constructed out of comparing the current price with a 20 day average and normalizing it based on mean deviation. The CCI usually falls in a channel of -100 to 100. A basic CCI trading system is: Buy if CCI rises above 100 and sell when it falls below 100. Sell if CCI falls below -100 and buy when it rises above -100.
The RSI is plotted on a scale of 0 to 100. Movements above 70 are considered overbought and below 30 are considered oversold. When a trend develops, an extreme reading in the RSI is typically observed. However, acting on it might make us exit prematurely. It is important to consider the trend of the RSI itself before you act on it.
The %R compares the latest close to the price range over a period of days. It is used in the same fashion as other indicators to identify overbought and oversold conditions.
The MACD combines the oscillator approach with exponential moving averages. The faster line (MACD line) is the difference between EMA12 and EMA26. The slower line (Signal line) is a 9 period exponential smoothed MACD line.
Additionally, you can use the histogram provided in the charts to get an early warning of crossovers; turns in the histogram back towards the zero line always precede crossovers.
Up Next: Chapter 12 – Candlesticks. Also discussed here.
This is a review of the 9th chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
A moving average looks back at the closing prices over a specific number of days (10, 20, 50…) and averages them. It can be used to generate signals.
A buy signal is generated when the shorter average crosses over the longer. A typical pair is the 10 and 50 day SMAs. Buy when SMA10 crosses above the SMA50, sell if it crosses down.
The 4-9-18 day is the most popular system. It is important to understand that SMA4 hugs the trend, followed by SMA9 and then SMA18. Hence, in an uptrend, SMA4 will be above the SMA9 which will be above SMA18. It will be the reverse in a downtrend.
Say the stock is in a downtrend. A buy signal is generated when SMA4 crosses the SMA9 & SMA18. A confirmed buy signal is generated when SMA9 also crosses the SMA18. When the uptrend reverses to the downside, SMA4 will dip below SMA9 (sell alert) and then SMA9 will dip below SMA18 (sell confirmation).
Two trading bands are placed around a moving average. The bands are two standard deviations from the average. i.e., 95% of the price movements will fall between these bands. As a rule, the market is overbought when they touch the upper band and oversold when the touch the lower band. If the prices bounce of the lower band and cross the average, then the upper band becomes a price target. A crossing below the average will identify the lower band as a target.
Also, in a strong uptrend, prices will fluctuate between the upper band and the average and a crossing below the average might warn of a trend reversal to the downside.
One last thing: The width of the bands are directly proportional to the volatility. When the bands are unusually far apart, it is often a sign that the current trend might be ending.
Read more about Bollinger Bands.
The system is:
Read more about the Donchain Channel.
Coming Up Next: Chapter 10 – Oscillators
This is a review of the 7th chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
Volume and Open Interest (OI for short) are used as confirming indicators. OI is simply the total number of outstanding contracts at the end of each day in the options/futures market. This handy table explains how OI changes:
(In #3 for example, the seller is initiating a new short where as the buyer is covering an old long.)
Simply put: volume should increase in the direction of the existing price trend. For example, in an uptrend, if a penetration of a previous high occurs on diminishing volume, the divergence should alert the trader. As a rule, all breakouts should occur on high volume.
On the other hand, if Open interest is
OBV is used to bring out the trend in volume. OBV is calculated by adding (subtracting) each day’s volume to a running cumulative total when the security’s price closes higher (lower). As a general rule: OBV should follow the same direction as the price trend. The Money Flow Index is a variation of OBV that is weighted by the price.
Monitoring the volume in calls (bulls) vs. puts (bears) allows us to gauge the degree of bullishness/bearishness i.e., when option traders are bullish, Put/Call ratios fall and v.v. It is usually used as a contrary indicator. A very high ratio signals an oversold market. A very low ratio warns of an overbought market.
Up Next: Chapter 9 – Moving Averages
