{"id":41599,"date":"2011-12-14T15:44:36","date_gmt":"2011-12-14T10:14:36","guid":{"rendered":"index.php\/2011\/12\/14\/technical-analysis-of-the-financial-markets-ch-7\/"},"modified":"2011-12-14T15:44:36","modified_gmt":"2011-12-14T10:14:36","slug":"technical-analysis-of-the-financial-markets-ch-7","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2011\/12\/14\/technical-analysis-of-the-financial-markets-ch-7\/","title":{"rendered":"Technical Analysis of the Financial Markets: Ch 7"},"content":{"rendered":"
\"Cover<\/a> <\/p>\n

Cover via Amazon<\/a><\/p>\n<\/div>\n

This is a review of the 7th chapter of John J. Murphy\u2019s Technical Analysis of the Financial Markets.<\/em><\/p>\n

Volume and Open Interest<\/h3>\n

Volume and Open Interest (OI<\/em> 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:<\/p>\n

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(In #3 for example, the seller is initiating a new<\/em> short where as the buyer is covering<\/em> an old long.)<\/font><\/p>\n

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General rules<\/h4>\n

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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<\/em> should alert the trader. As a rule, all breakouts should occur on high volume.<\/p>\n

On the other hand, if Open interest is<\/p>\n

    \n
  1. Rising in an uptrend, it is bullish (new money is entering the market)\n
  2. Declining in an uptrend, it is bearish (short covering rally)\n
  3. Rising in a downtrend, it is bearish (new money is entering the market)\n
  4. Declining in a downtrend, it is bullish (longs are getting liquidated)<\/li>\n<\/ol>\n

    On Balance Volume (OBV)<\/h4>\n

    OBV is used to bring out the trend in volume. OBV is calculated by adding (subtracting) each day\u2019s volume to a running cumulative total when the security\u2019s price closes higher (lower). As a general rule: OBV should follow the same direction as the price trend. The Money Flow Index<\/a> is a variation of OBV that is weighted by the price.<\/p>\n

    Put\/Call Ratios<\/h4>\n

    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<\/em> indicator. A very high ratio signals an oversold market. A very low ratio warns of an overbought market.<\/p>\n

    Up Next: Chapter 9 \u2013 Moving Averages<\/em><\/p>\n

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    Related articles<\/h6>\n