Category: Your Money

Technical Analysis of the Financial Markets: Ch 7

Cover of "Technical Analysis of the Finan...

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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:

 

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(In #3 for example, the seller is initiating a new short where as the buyer is covering an old long.)

 

 

General rules

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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

  1. Rising in an uptrend, it is bullish (new money is entering the market)
  2. Declining in an uptrend, it is bearish (short covering rally)
  3. Rising in a downtrend, it is bearish (new money is entering the market)
  4. 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

 

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Chinese Fried Rise

Chinese wall

Image by rvw via Flickr

I am sick and tired of hearing about how China is “awesome” and India “sucks” when it comes to infrastructure. Sure, we have our bureaucracy and corruption, but its nothing compared to the scale at which it occurs in China. For us, a down day is when farmers refuse to pay back SKS. Compare that with Chinese bank loans that stood at $6,500 per capita in 2010 compared to gross domestic product (GDP) per capita of $4,400.

And their much envied high speed trains? It is a $330 billion scam where railway bridges were constructed by untrained unskilled migrant workers and rocks and gravel were tossed into pier foundations instead of concrete. Take this: when two bullet trains collided in July 2011, bulldozers buried the rubble even as bodies fell out of the windows of the carriages.

So what about the growth miracle? Sure, China is to manufacturing as India is to IT & BPO. But they seem to have lost their way when their “planned” economy allowed property construction to take up 13% of their GDP (from 3% in 1999) compared to 5% in India.

Yes, we flushed $7.82 billion down the NREGA. But we have nothing on the 18,000 officials who have fled the country taking a combined $126 billion dollars with them.

So the next time you wish for the Chinese miracle in India, keep in mind that our bottom-up economy, for all its messiness, is still better than one that is centrally planned and top-down.

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