13 Tools Of Math For Smarter Investing

Trading System Signals

citybusiness coverThere are 13 basic tools using technical analysis that can assist you in investing. These tools of technical analysis, combined with fundamental analysis, could give you more confidence in decision-making.

10 Day Moving Average Long/Short Signal

The 10 Day Moving Average Long/Short signal is designed to identify stocks that are technically sound and whose price has retraced to within 1% of its 10 day moving average. This condition is typically a good entry point since it represents a situation where by a stock is in a short term up trend and has retraced back to an area which represents the average price paid for the stock over the preceding ten day period.
In addition to the above criteria, both the Money Flow Index and the slope of the next longer term moving average (21 Day) are incorporated into the formula. The Money Flow Index (MFI) is an oscillator that tracks the flow of money into or out of a stock. A MFI value over 80 signals an Overbought (Bearish) condition while readings below 20 are considered to be an Oversold (Bullish) condition. To confirm the stock’s longer term price trend, the slope of the 21 day moving average is utilized. A Positive slope (Bullish) denotes a rising moving average while a Negative Slope (Bearish) denotes a declining moving average.

The following is a summary of the conditions necessary to generate the 10-Day Moving Average BUY/SHORT signals:

Buy:

  1. Stock Wthin 1% Of Its 10-Day MA
  2. Slope Of The 21-Day MA Is Positive
  3. MFI Is Under 20 (oversold)

 Short:

  1. Stock Within 1% Of Its 10-Day MA
  2.  Slope Of The 21-Day MA Is Negative
  3.  MFI Is Over 80 (overbought)

 

 The 21 Day Moving Average Long/Short signal

The 21 Day Moving Average Long/Short signal is designed to identify stocks that are technically sound and whose price has retraced to within 1% of its 21 day moving average. This condition is typically a good entry point since it represents a situation where by a stock is in a short term up trend and has retraced back to an area which represents the average price paid for the stock over the preceding twenty-one day period.
In addition to the above criteria, both the Money Flow Index and the slope of the next longer term moving average (50 Day) are incorporated into the formula. The Money Flow Index (MFI) is an oscillator that tracks the flow of money into or out of a stock. A MFI value over 80 signals an Overbought (Bearish) condition while readings below 20 are considered to be an Oversold (Bullish) condition. To confirm the stock’s longer term price trend, the slope of the 50 day moving average is utilized. A Positive slope (Bullish) denotes a rising moving average while a Negative Slope (Bearish) denotes a declining moving average.

The following is a summary of the conditions necessary to generate the 21-Day Moving Average BUY/SHORT signals:

Buy:

  1. Stock Within 1% Of Its 21-Day MA
  2. Slope Of The 50-Day MA Is Positive
  3. MFI Is Under 20 (oversold)

Short:

  1.  Stock Within 1% Of Its 21-Day MA
  2. Slope Of The 50-Day MA Is Negative
  3. MFI Is Over 80 (overbought)

Stochastics Cross

Stochastics is an Overbought/Oversold oscillator that compares today’s price to a present window of high and low prices. This data is then transformed into a numerical range that varies between 0 and 100. Stochastic readings of 20 or less denote an Oversold condition. Values of 80 or greater signal an Overbought scenario. Stochastic indicators can either be Fast or Slow and are referred to as as Fast %K and Slow %K. Slow %K is the same as Fast %K except that it is smoothed with a simple moving average to make it less erratic.
The relative movements of each stochastic value are used to identify both Buy and Short Sale entry points. Buy Signals are generated when Fast %K is below 20 (Oversold), is increasing in value and crosses Slow %K curve from below. Short Sale Signals occur when Fast %K is above 80 (Overbought), is decreasing in value and crosses Slow %K from above.

Wilder’s RSI Cross

RSI was developed by J. Welles Wilder to detect Overbought and Oversold conditions. The Index is comprised of three variables:

  1.  the average of all UP closes during a given period
  2. the average of all Down closes during the same period
  3. the length of the period in days over which these averages are taken

RSI measures the degree of strength left in a price trend. If Price has been declining and RSI drops to 30 or lower, traders should be alerted to a probable reversal of the downtrend, since momentum would appear to be losing its strength. If RSI moves above 70 as Price rises, an intermediate top is usually imminent.
Oscillator indicators such as RSI are most effective in a trading range market environment. The problem with oscillators is that stocks can enter an Overbought/Oversold area and remain in this condition for an extended period of time. Research has demonstrated that the best signals obtained from the RSI oscillator are when the stock is coming out of these extreme conditions.

Buy signals are generated when a stock’s RSI value has been under 30 (oversold) and then crosses above 30. Short Sale signals are created when a stock’s RSI value has been over 70 (overbought) and then crosses below 70.

Commodity Channel Index (CCI)

CCI is a powerful technical tool that is used to identify stocks that are either at the top or bottom of their trading cycle. The CCI reflects the increase in volatility that typically occurs as a stock approaches either a short term top or bottom. As the mean price of a stock distances itself from its average mean price, the stock approaches an Overbought/Oversold area. CCI readings of -100 or less are regarded as Oversold (bullish) while readings of +100 and higher are considered to be an Overbought (bearish) condition. Once the CCI enters either of these regions, conditions exist for the short term trader to enter the market.
Although CCI signals provide excellent entry points, research has demonstrated that stronger BUY/SELL signals can be achieved by delaying entry points until the CCI retraces from an Overbought/Oversold area and crosses the zero line.

Buy signals are generated when the CCI declines below -100 and the crosses the zero line from below while Short Sale signals are produced when the CCI exceeds +100 and the crosses the zero line from above. generated a CCI-SELL signal.

Chaikin Oscillator

The Chaikin Oscillator integrates the effect of volume and price movement when determining Buy/Sell points. It uses the product of average price for a day’s trading activity and volume. The underlying premise is that as the price of a stock moves up it is under accumulation and down when under distribution. The key is that the stock’s daily volume must confirm the move to be valid. The Chakin Oscillator creates a volume multiplier which increases during periods of accumulation (stock closes above its midpoint for the day) and decreases during periods of distribution (stock closes below its midpoint for the day). When all variables are taken into account, the Chaikin Oscillator has its highest values when price is increasing under heavy volume, conditions present during a healthy advance. The lowest values are generated during a price decrease under low volume.
Buy signals are generated when the Chaikin Oscillator is making new lows and the slope of the 21-day moving average is positive. Short Sale signals are created when the Chaikin Oscillator is making new highs and the slope of the 21-day moving average is negative.

10 Day/21 Day Moving Average Cross

A stock’s moving average is the average of the closing prices over a designated period of time. The last point of a ten-day moving average is the average price that the stock closed at over the last ten trading days. The second to last point is the average close of the next most recent ten days, and so on. These points are plotted over time to form a graph representing the smoothed price movement of the stock. The fewer the number of days used in a moving average, the more sensitive the moving average will be. This is because one day’s closing price will have a greater effect on an average of the closes over the last ten days than it will on an average over the last twenty-one days.
Moving average trading strategies are based on crossings of faster and slower moving average to trigger Buy and Sell signals. The logic behind this approach is that as a fast moving average crosses a slower moving average, the price trend of the stock is reversing.

Buy signals are generated when the faster moving 10-Day Moving Average crosses the slower moving 21-Day Moving Average from below. Conversely Short Sale signals are created when the faster moving 10-Day Moving Average crosses the slower 21-Day Moving Average from above.

MACD-ST Cross

Developed by Gerald Appel, Moving Average Convergence/Divergence Short Term (MACD-ST Cross) utilizes various exponential moving averages of a stock’s closing price to generate Buy and Sell signals. Exponential moving averages assign greater weight to the most recent price data and therefore are more sensitive than simple moving averages. MACD consists of the Differential Line and the Signal Line. The Differential Line is constructed by measuring the difference between two exponential moving averages, a 12- and 26-day time period. The Signal Line is a 9-day exponential moving average of the Differential Line.
Buy signals are generated when the Differential Line crosses the Signal Line from below while Sell signals occur when the Differential Line crosses the Signal Line from above. For the Differential line to cross the Signal Line from below the difference between the 12-day and the 26-day exponential moving averages must widen (diverge). For this to occur, the shorter term moving average (12-day) must move away from the longer term moving average. The Buy signal is triggered when this divergence is sufficient enough to cause a cross of the Signal Line.

Short Sale signals are generated when the opposite scenario exists. The difference between the 12-day and the 26-day averages must narrow (converge), suggesting that the price of the stock is trending down. The signal occurs when the declining Differential Line crosses the Signal Line from above.

MACD-LT Cross

Moving Average Convergence/Divergence Long Term (MACD-LT Cross) was developed by Gerald Appel. MACD utilizes various exponential moving averages of a stock’s closing price to generate Buy and Sell signals. Exponential moving averages assign greater weight to the most recent price data and therefore are more sensitive than simple moving averages. MACD consists of the Differential Line and the Signal Line. The Differential Line is constructed by measuring the difference between two exponential moving averages, a 38- and 78-day time period. The Signal Line is a 18-day exponential moving average of the Differential Line.
Buy signals are generated when the Differential Line crosses the Signal Line from below while Sell signals occur when the Differential Line crosses the Signal Line from above. For the Differential line to cross the Signal Line from below the difference between the 38-day and the 78-day exponential moving averages must widen (diverge). For this to occur, the shorter term moving average (38-day) must move away from the longer term moving average. The Buy signal is triggered when this divergence is sufficient enough to cause a cross of the Signal Line.

Short Sale signals are generated when the opposite scenario exists. The difference between the 38-day and the 78-day averages must narrow (converge), suggesting that the price of the stock is trending down. The signal occurs when the declining Differential Line crosses the Signal Line from above.

21 Day/50 Day Moving Average Cross

A stock’s moving average is the average of the closing prices over a designated period of time. The last point of a ten-day moving average is the average price that the stock closed at over the last ten trading days. The second to last point is the average close of the next most recent fifty days, and so on. These points are plotted over time to form a graph representing the smoothed price movement of the stock. The fewer the number of days used in a moving average, the more sensitive the moving average will be. This is because one day’s closing price will have a greater effect on an average of the closes over the last fifty days than it will on an average over the last two-hundred days.
Moving average trading strategies are based on crossings of faster and slower moving average to trigger Buy and Sell signals. The logic behind this approach is that as a fast moving average crosses a slower moving average, the price trend of the stock is reversing.

Buy signals are generated when the faster moving 21-Day Moving Average crosses the slower moving 50-Day Moving Average from below. Conversely Short Sale signals are created when the faster moving 21-Day Moving Average crosses the slower 50-Day Moving Average from above.

50 Day/200 Day Moving Average Cross

A stock’s moving average is the average of the closing prices over a designated period of time. The last point of a ten-day moving average is the average price that the stock closed at over the last ten trading days. The second to last point is the average close of the next most recent fifty days, and so on. These points are plotted over time to form a graph representing the smoothed price movement of the stock. The fewer the number of days used in a moving average, the more sensitive the moving average will be. This is because one day’s closing price will have a greater effect on an average of the closes over the last fifty days than it will on an average over the last two-hundred days.
Moving average trading strategies are based on crossings of faster and slower moving average to trigger Buy and Sell signals. The logic behind this approach is that as a fast moving average crosses a slower moving average, the price trend of the stock is reversing.

Buy signals are generated when the faster moving 50-Day Moving Average crosses the slower moving 200-Day Moving Average from below. Conversely Short Sale signals are created when the faster moving 50-Day Moving Average crosses the slower 200-Day Moving Average from above.

OBV Price Divergence

The original theory of On-Balance-Volume (OBV) was developed by Joseph Granville. The basic assumption underlying the method is that the marketplace is divided between “Smart Money” and the “General Public.” Smart money accumulates stocks at low prices and distributes it to the general public at higher prices. The OBV technique is an attempt to uncover smart money’s hidden accumulation and distribution patterns before significant price movement occurs.
OBV is computed in the following manner. If a stock closes up for the day, the total volume for that day is considered to have been Buy Induced and therefore the stock is under accumulation. Conversely, a stock that closes down for the day is regarded as having been under Sell Induced pressure and the trading activity is considered to have been distribution. The volume on Up days is totaled against the volume traded on Down days. The net is a 50 day running total of OBV, and is either a positive which is bullish (BL) or negative, a bearish (BR) condition.

Buy signals are created when OBV is positive and price has experienced a negative divergence meaning it is lower than it was when OBV previously peaked. Short Sale signals are generated when OBV is negative and price has experienced a positive divergence meaning it is higher than it was when OBV recorded a new low reading. Both of these conditions suggest a potential sling shot move in the stock as price returns to levels in line with the OBV indicator.

Relative Strength Breakout

Relative Strength (RS) is calculated by taking a stocks price performance and comparing it to the price performance of the S&P 500 over the previous fifty days of trading. RS ratings of 1.01 or higher are positive and indicate that the stock has out performed the S&P 500 during the last 50 days. Readings of .99 or less indicates that the stock has under performed the S&P 500, a negative condition.
Buy signals are created when RS is positive and price has experienced a negative divergence meaning it is lower than it was when RS previously peaked. Short Sale signals are generated when RS is negative and price has experienced a positive divergence meaning it is higher than it was when RS recorded a new low reading. Both of these conditions suggest a potential sling shot move in the stock as price returns to levels in line with the Relative Strength indicator.

 

Source:

© 2013 Computrade Systems, Inc. Market Edge® and Second
Opinion® are registered trademarks of Computrade Systems, Inc.

Disclaimer:

Advanced Tools is designed for the experienced investor/trader. It consists of 3 modules: Point & Figure Analysis, Trading Systems, and Industry Group Analysis.

Point & Figure Analysis uses Point & Figure Charts to identify stocks which are breaking through Resistance(bullish) or Support(bearish) areas. This module identifies those stocks that have broken through these areas and those stocks that will break through if they trade through the Breakout Price. Point & Figure Analysis is for those traders who are thoroughly familiar with the use of Point & Figure Charts.

Trading Systems is for the advanced technicians. It is a series of technical trading systems that identify significant chart patterns. In order to properly use one of these systems, you need to be completely familiar with the technical indicators that make up the system. This is not for novices.

Industry Group Analysis provides daily analysis for 94 major industry groups. The groups are first analyzed using various Market Edge indicators to identify those groups that show favorable/unfavorable market conditions. The individual stocks that make up the group are then reviewed using Second Opinion for buy/short decisions. The purpose of this analysis is to identify those stocks in the groups that are leading the industry. Studies have shown that when an Industry group moves, the entire group tends to move in concert, with certain stocks in the group outperforming the remaining stocks.

To properly use Industry Group Analysis, the investor/trader must have superior discipline in that there are very few independent decisions to make once a group has been identified. The user must stick to the list of stocks in the group and not add stocks he thinks may be similar.

Market Letter consists of three proprietary market timing models; the Cyclical Trend Index (CTI), the Sentiment Index and the Momentum Index.

Cyclical Trend Index (CTI): The CTI is based on a technical application known as Cyclical Analysis. The underlying premise of Cyclical Analysis is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves, a basic cycle which determines much of the motion in the universe. The utilization of sine waves in market forecasting is based on studies that demonstrate that stocks, and in particular the DJIA, tend to experience price reversals at anticipated time intervals. These intervals, referred to as cycles, consist of the price movement of the DJIA from a significant Low to an identifiable High, followed by a retreat to a recognizable Low. Cyclical Analysis systematically determines the beginning and ending points of these various cycles enabling the user to accurately time purchases and sales for maximum profit. To picture how these cycles influence price direction, visualize the stock market as a piece of elastic that is constantly subjected to positive or negative forces that exert pressure in the same or opposite directions. These forces are the five cycles that are incorporated in the CTI. The following table classifies each Cycle by its average time duration:

Cycle Average Time Duration A 6 weeks (+or-) 2 weeks B 18 weeks (+or-) 3 weeks C 36 weeks (+or-) 5 weeks D 72 weeks (+or-) 10 weeks E 216 weeks (+or-) 32 weeks

Ideally, each cycle exerts upward pressure at the beginning of its time frame and continues to do so until it is one-half completed. At this point, the process is reversed resulting in negative pressures being applied to the market. When dealing with five cycles, the picture can become confusing. Two cycles may be in an up posture, while one may be flat, and the remaining two may be pointing down. In order to have a collective positive or negative picture of the state of the market, each cycle must be evaluated in such a way as to total their independent, positive or negative forces. This is done by assigning each cycle either a positive or negative numerical value based upon the amount of time that has elapsed since it’s previous bottom. The sum of these + or – values is called the Cyclical Trend Index (CTI). This indicator reduces the cyclical status of the market to an absolute, numerical value. Readings of +1 to +21 indicate a Bullish trend in the market, whereas a 0 to -21 value signals a downward, Bearish scenario.

A major problem that can arise when employing Cyclical Analysis in forecasting the market is the determination of starting points for the various cycles. Errors in assigning an accurate count can lead to aborted readings and adverse results. This problem can occur when identifying a cycle’s low and is most pronounced when more than one of the cycles are due to make a bottom. In order to rectify this problem, both a Momentum Index and a Sentiment Index have been developed and are used in conjunction with the Cyclical Trend Index to refine the Market Timing Model.

Momentum Index: The Momentum Index is designed to measure market divergence by comparing the performance of eight, non-Dow Jones Industrial Average Indices to that of the Dow Jones Industrial Average. Divergence is a technician’s term that measures whether the DJIA is performing better or worse than the majority of the other market indices. Whenever the DJIA goes its own way for a period of time, whether up or down, a market turn is usually at hand. Typically, negative divergence (DJIA is up while broader indices are trending down) exists at significant market tops, while positive divergence (DJIA is down while broader indices are trending up) indicates a market bottom.

Momentum Index::……………………………………………+3             Bullish

Indicators Current Reading Connotation
Dow Jones Industrial Averages (DJIA) 11005.37
Dow Jones Transportation Average 2929.20 NEGATIVE
S&P 500 Index 1277.9 NEGATIVE
NYSE Composite Index 647.13 NEUTRAL
NYSE Advance-Decline Line -58859 POSITIVE
10 Day MA Advance-Decline Line 1.21 POSITIVE
AMEX Index 936.04 POSITIVE
NASDAQ Composite Index 2251.06 NEGATIVE
DJ Utilities Index 390.07 POSITIVE
Trin (5 Day Average) 1.34 NEUTRAL
NYSE New High-New Lows 511-48 POSITIVE
Zweig Breadth Indicator 0.46 NEGATIVE
McClellan oscillator -1 NEGATIVE
McClellan Summation Index 2879 NEGATIVE
Unchanged Issue index 0.07 NEUTRAL

Included in the Index are four additional indicators that measure the market’s positive or negative breadth & momentum. An explanation of these indicators follows.

Zweig Breadth Indicator divides the number of NYSE advancing issues by the sum of the NYSE advancing and declining issues. Readings above .6 are regarded as Bullish while levels below .4 are Bearish.

McClellan Oscillator measures the difference between the number of NYSE advances and declines over a 19-day period subtracted from the number of advances and declines over a 39-day observation. This indicator is regarded as Bullish when it drops below zero and is Bearish when above zero.

TRIN 5-Day Average is computed by dividing the ratio of NYSE advancing issues to declining issues by the ratio of advancing issue volume to declining issue volume. Market Edge calculates a ten-day moving average of this index. Values above 1.24 are Bullish, while values below .75 are Bearish.

Unchanged Issue Index is calculated by dividing the number of NYSE unchanged issues by the total number of NYSE issues traded. Readings less than .186 are Bearish, while readings greater than .22 are Bullish.

Sentiment Index: The Sentiment Index, which measures the degree of optimism or pessimism prevalent in the market, is an important indicator when attempting to determine he market’s future direction. Market Edge tracks nine technical indicators that measure excessive speculative or sentiment conditions prevalent in the market.

Sentiment Index . . . . . . . . . . . . . . . . . . . . . . . . . . +3             Neutral

Indicators Current Reading Connotation
Odd Lot Short Ratio (5 Day Avg.) 5.24 BEARISH
NYSE Short Interest Ratio 4.80 BULLISH
Public-Specialist Short Ratio 0.36 NEUTRAL
Put/Call Ratio (5 day Avg.-Index Options) 1.40 BULLISH
Dividend Yield Spread 5.56 NEUTRAL
Mutual Fund liquid Asset Ratio 5.80 BULLISH
Bullish Investment Advisors 47.9 NEUTRAL
Bearish Investment Advisors 35.4 NEUTRAL
Bearish + Corrections Total 52.1 NEUTRAL
VIX (CBOE Volatility Index) 22.9 NEUTRAL

Sentiment based technical indicators are:

Indicators Current Reading Connotation
Odd Lot Short Ratio: The number of Odd Lot shares sold short divided by the total number of Odd Lot sales. +10 – +50+.06 – +.09+.00 – +.05 BULLISH NEUTRAL BEARISH
NYSE Short Interest Ratio: The number of shares sold short on the NYSE divided by the average monthly trading volume. +3.5- +9.0+3.0 – +3.5+0.0 – +3.0 BULLISH NEUTRAL BEARISH
Public-Specialists Short Ratio: The number of NYSE shares sold short by the public divided by the # of shares sold short by the specialist. +.60 – UP+.36 – +.59+.00 – +.35 BULLISH NEUTRAL BEARISH
Put-Call Option Ratio: A ten day moving average of the number of Index Put options purchase divided by the number of Index Call options purchased. +1.70 – UP+1.00 – +1.69+.00 – +1.00 BULLISH NEUTRAL BEARISH
Dividend Yield Spread: The relationship between the average NYSE dividend rate and the yield on thirty-year Treasury bonds. +3.00 – +5.75+5.75 – +6.75+6.75 – +9.99 BULLISH NEUTRAL BEARISH
Mutual Fund Liquid Asset Ratio: The ratio of mutual fund cash to total assets. +11% – +20%+09% – +10%+00% – +08% BULLISH NEUTRAL BEARISH
Bullish Investment Advisors: The percentage of newsletter writers who are Bullish on the market as measured by Investors Intelligence. +00% – +40%+41% – +54%+55% – +99% BULLISH NEUTRAL BEARISH
Bearish Investment Advisors: The percentage of newsletter writers who are Bearish on the market as measured by Investors Intelligence. +50% – +99%+21% – +49%+00% – +20% BULLISH NEUTRAL BEARISH
Bearish + Corrections Total: The total percentage of newsletter writers who are either Bearish or forecasting a correction for the market as measured by Investor Intelligence. +00% – +29%+30% – +69%+70% – +99% BULLISH NEUTRAL BEARISH

Each indicator is assigned a positive, negative or zero value depending on whether its reading is deemed to be Bullish, Bearish or Neutral. The sum of these values is referred to as the Sentiment Index. Plus 3 to plus 11 readings are Bullish, while minus 1 to minus 11 readings are Bearish.

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