Author: shyam
This is a review of the 9th chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
Moving Averages
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.
The Double Crossover Method
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 Triple Crossover Method
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).
Bollinger Bands
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.
Donchian Channel or the 4 Week Rule
The system is:
- Cover short positions and go long whenever the price exceeds the highs of the four preceding calendar weeks
- Liquidate long positions and go short whenever the price falls below the lows of the four preceding calendar weeks
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
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.)
General rules
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
- Rising in an uptrend, it is bullish (new money is entering the market)
- Declining in an uptrend, it is bearish (short covering rally)
- Rising in a downtrend, it is bearish (new money is entering the market)
- Declining in a downtrend, it is bullish (longs are getting liquidated)
On Balance Volume (OBV)
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.
Put/Call Ratios
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
Will someone think of building a fake Disneyland. 100 acres, and 45 minutes from Beijing, construction was abandoned almost a decade ago. Not sure what is worse: that it was fake or that it was abandoned.
The infamous ghost town Ordos that Time did a spread on.
Chenggong, an empty forest of skyscrapers.
Better not to think about what’s going to happen when the music stops in China.
This is a good follow for the correlation article. Source: BW
