Itech lecture 6 Flashcards
What is volume
-The amount of shares or contracts traded over a specific period
-Can also mean a change in volume
What is volumed used for?
Used to confirm price, so it is a secondary analysis
How is volume depicted on the chart?
As a bar chart at the bottom
How should HIGH volume move in regards to the trend?
Volume should move in the direction of the trend
If volume is not going with the trend, what does that mean?
Warning of potential trend reversal
What does exceptionally high volume refer to?
Signal of important change
When prices are rising, how should volume act? (give 2)
1) volume increasing is confirming
2) volume decreasing is questionable (puts upward trend in question)
When prices are declining, how should volume act? (give 2)
1) volume increasing is confirming (lower price = more sales)
2) Volume decreasing is questionable (puts downward trend in question)
When price advance halts with high volume, what may this mean?
It is a potential top
When price decline halts with high volume, what may this mean?
It is a potential bottom
What are the 2 methods of analyzing volume confirmation
1) volume indexes
2) volume related oscillators
What are indexes compromised of?
cumulative sums of data measuring supply and demand over time, rather than a specific period
When are volume indexes more useful?
In trending markets
**What is on-balance volume (OBV)?
Cumulative index of plus or minus volume days based on change of closing prices
How is OBV calculated if price close is higher than previous day close?
Add the day’s volume
How is OBV calculated if price close is lower than previous day close?
Deduct the day’s close
If price reaches a new high, what should OBV do?
Confirmation should come from OBV hitting a new high as well
If price and OBV go in opposite directions, what does this mean?
It is a negative divergence which warns of potential reversal
In AD index, if the close occurs above the midpoint for the day, what is the result?
Result is positive accumulation, so the AD goes up
In AD index, if price closes below midpoint for the day, what is the result?
Result is a negative accumulation, AD goes down
If price moves to high upper bound level, what does this mean?
Creates an overbought condition
(price > fair price)
If price moves to lower bound, waht does this mean?
Creates an oversold condition
(price < fair price)
When are volume related oscillators most useful?
For trading in range markets
What are volume oscillators?
A ratio between two main moving averages of volume and is used to determine when volume is expanding or contracting
If volume is expanding, what does this mean?
Implies strength of trend
If volume is contracting, what does this mean?
Implies weakness of trend
Volume oscillator is useful for…?
Confirming the trend and giving advance warning in a trend range of potential next breakout
What does the Chaikin money flow use?
Uses the accumulation/distribution calculation each day
In chaikin money flow, when does the oscillator rise above zero?
When an upward trend begins
In chaikin money flow, when does the oscillator go below zero?
When a downtrend begins
What do volume spikes represent?
A sign of sudden change in information (gap) or other pattern breakout
When are volume spikes most common?
At the begging and end of a trend
What is momentum?
-It is the measure of velocity of price movements, rather than price movements themselves
-Rate of change, how quick they are going up or down
What leads to price action
Momentum
What are the 4 momentum indicators?
1) Rate of change
2) MACD
3) Stochastic
4) RSI
What two lines does the MACD use?
The MACD line and the signal line
How is the MACD line calculated?
By finding the difference between two exponential moving averages (EMA’s) of closing prices
What is the signal line?
It is the 9 period EMA of the MACD
When the MACD is above 0, what does this mean?
Suggests an upward trend
What is a buy signal using the MACD line
When the MACD line crosses the signal line from below and both lines are below 0
What is a sell signal using the MACD line?
When MACD line crosses the signal line from above and above the 0 zone
When is a stock overbought in MACD
when lines are far above the 0 line
When is a stock oversold in a MACD
when lines are far below the 0 line
If MACD histogram is getting smaller, what does this mean?
Provides early warnings that current trend is losing momentum
What does rate of change (ROC) measure
Measures the amount a stock price has changed over a given period of past periods
What are some problems with ROC
-drop off effect
-only two prices in calc
-prices are equally weighted
What is a buy signal in ROC
When ROC crosses the 0 line from above
What is a sell signal in ROC
When the ROC goes lower from above overbought level
RSI is bounded from what range?
0-100
When is an RSI overbought?
Above 70
When is an RSI oversold?
Below 30
How long can a trending market stay overbought or oversold in RSI
Can be for a long time
If oscialltor moves to lower or upper bound in RSI, should you sell/buy
No, it may not be a reason to sell/buy
**In a bull market, RSI is usually…?
Above 50
**In a bull market RSI ranges from?
55-85
**In a bear market, RSI ranges from?
25-65
When would a positive RSI take place?
Once the RSI reaches a low that is lower than its previous low at the same time as the price reaches a higher low than its previous low. This is a bullish sign and a buy signal
When would a negative RSI take place?
Once the RSI reaches a high that is higher than its previous high while security’s price reaches a lower high. This is a bearish sign and sell signal
In stochastic oscillator, as prices increase, where to prices tend to be?
Tend to be at the upper end of the price range
In stochastic oscillator, in down trends, where do prices tend to be?
Tend to be near the lower end of the range
What does stochastic oscillator measure?
Measures current closing price versus defined past window of prices
**When does stochastic oscialltors work best?
In trading markets but still give valuable info in trending markets
Stochastic oscillators are bounded from what range?
0-100
When is stochastic oscillators overbought
above 80
When is stochastic oversold
below 20
What are some similarities between oscillators? (name 3)
-similar in use
-strong trending markets can stay overbought or oversold for a long time
-just because oscillator moved to upper or lower bound, does not mean its a buy or sell signal
What does strong momentum suggests?
Trending market
What does weak momentum suggest?
Consolidating market, trend is dissapearing (trading market)
When are oscillators more useful?
In trading range markets as overbought/oversold indications
In trading markets, oscillators are more useful as…?
overbought/oversold indications
What does market breadth measure?
Measures the internal strength of the market by considering whether stocks are gaining or losing strength in price
How should breadth line move?
Should follow and move to new highs and lows with the stock market index
If breadth line does not move to new highs and lows with the stock market index, what does this mean?
There is a divergence which will lead to a price reversal
If the S&P 500 is rising and if S&P 500 A-D line is falling, what sign is this?
This is a bearish sign/warning
