Lecture 6 (momentum & volume indicators) (20% of final from this lecture) Flashcards
What does volume represent in shares?
It is the amount of shares or contracts traded over a period
How is volume portrayed (displayed)?
Vertical bar below price chart
How is volume used in price?
Volume is used to confirm price, meaning volume is secondary to price analysis
How should high volume move when comparing it to the trend?
Volume should move in the direction of the trend
If volume is not moving with the trend, what may it warn you of?
Warning of impending trend reversal
What does exceptionally high volume signal?
Signals an important change
What are two characteristics of volume as price RISES (uptrend)?
1) volume increasing is confirming
2) if volume is decreasing, may put uptrend in question
What are two characteristics of volume as price DECLINES (downtrend)?
1) volume increasing is confirming (lower price = more sells)
2) if volume is decreasing, may put downtrend in question
What is the potential signal if price advance halts at high volume?
It is a potential top
What is the potential signal if price advance halts at high volume?
It is a potential bottom
What does volume display?
Volume displays the intensity of a move in price
What are the other 2 methods for analyzing volume confirmation?
1) volume indexes
2) volume related oscillators
What are volume indexes, give 5 characteristics
1) indexes are compromised of cumulative sims of data measuring supply and demand over time, rather than at a specific period
2) they do not have an upper and lower bound
3) the level of the index is irrelevant, it shows absolute changes
4) compare price with index looking for differences between highs and lows in each
5) can utilize trend lines, sometimes pattern analysis
When are volume indexes more useful?
In trending markets
What is “on balance volume”?
Cumulative index of plus or minus volume days based on change of closing prices
How is on balance volume calculated?
-if price close is higher than previous day, add the day’s volume
-if price close is lower than previous day, deduct the day’s volume
How do you use on balance volume (OBV) when high volume should confirm price trend
Compare price to OBV
-if prices reaches a new high, confirmation of price strength comes from OBV hitting a new high
What does a negative divergence between price and OBV warn
Warns of potential price reversal
What are volume related oscillators, give 3 characteristics
1) oscillate between an upper and lower bound (upper and lower vertical limits).
2) A move to high upper bound level means “overbought” conditions
3) A move to a lower bound level produces an “oversold” conditions
4) shows relative changes
5) used for divergence (differences) analysis, trend lines, sometimes pattern analysis
When are volume RELATED oscillators more useful?
Useful for trading ranges
What is a volume oscillator?
Is a ratio between two moving averages of volume and is used to determine when volume is expanding or contracting
What does expanding volume in volume oscillator represent?
Implies strength in the trend
What does contracting volume in volume oscillator represent?
Implies weakness in the trend
When is volume oscillator useful for?
Confirming the trend and for giving advanced warning in a trading range of direction for the next breakout
What does a Chaikin money flow produce?
produces an oscillator that rises above zero when an upward trend begins and declines below zero when the trend turns downwards
What is negative divergence?
When the price and volume say opposite stories (ex: price reaches a higher high, but volume reaches a lower low)
What are volume spikes
a sign of a sudden change in information (gap) or other pattern breakout
When are volume spikes most common
Most common at the beginning and end of a trend
What is momentum? (give 3 characteristics)
1) Can give advance warning of potential trend change since momentum leads price action
2) Momentum is the measure of the velocity of price movements, rather than price movements themselves
3) It is the rate of change of price, how fast it changes, hiw steep the trend is
What is another word for momentum?
Price oscillator
What does momentum indicators/oscillators provide?
-Provide leading signal generators and confirms price
-Generate entry and exit signal but always with respect to trend direction , therefore momentum signals are to be used secondary to price analysis
How does momentum oscillators work?
-oscillate between an upper and lower bound so move to high upper bound level creates and “overbought” condition, and move to a lower bound level means “oversold” condition
-to indicate divergences between momentum and price trend and as a result gives a leading indication to price trend change
-The crossing of the 0 or midpoint line can give you a signal of trend change
What is the meaning of the word “divergences”
When momentum fails to confirm the price trend
What is the meaning of negative divergence
Price hits a higher high, but momentum oscillator hits a lower high
What is the meaning of positive divergence
Price hits a lower low, but momentum oscillator hits a higher low
What is the meaning overbought in momentum
When prices are noticeably above the central trend, and hits the upper boundary level of momentum oscillator
What is the meaning of oversold in momentum
When prices are noticeably below the central trend, and hit the lower boundary level of a momentum oscillator
What is the biggest problem with momentum?
Momentum indicator won’t show much on big price changes
What are the 4 types of different momentum indicators
1) Rate of change (ROC)
2) Moving averages convergence divergence (MACD)
3) Stochastic
4) Relative strength index (RSI)
What is moving average convergence divergence (MACD)?
The use of both a MACD and signal line plotted on a price chart
When does the MACD suggest an upward trend?
When the MACD is above the 0 line (short term EMA > Long term EMA)
How is MACD line used with signal line for BUY signals
Buy signal: When the MACD lines crosses the signal line from BELOW and both lines are above the 0 zone. Best buy signals occur below the 0 zone
How is MACD line used with signal line for SELL signals
Sell signal: when the MACD lines crosses the signal line from ABOVE and above the 0 zone
How can overbought be shown with MACD and signal lines
When both lines are far ABOVE the 0 line
How can oversold be shown with MACD and signal lines
when lines are are far BELOW the 0 line
When is MACD most useful
Useful in trending markets because it is unbounded (no upper or lower boundaries)
What is rate of change (ROC)?
-Measures the amount a stock price has changed over a given number (N) of past period
-simplest oscillator but has many issues
What are some issues/problems with ROC
-suffers from drop off effect
-only two prices appear in the calculation
-prices in the calculation are equally weighted
How is ROC used to generate a BUY signal
When the ROC crosses the 0 line from BELOW
How is ROC used to generate a SELL signal
When the ROC goes lower from ABOVE overbought level
What is relative strength index (RSI)?
Measures a security’s price strength relative to its own past price history
-NOT to be confused with relative strength
What is RSI bounded range
Bounded by the range of 0-100
What is the “score” given to overbought in RSI
Anything above 70
What is the “score” given to oversold in RSI
Anything below 30
What is the RSI ranges in a bull market
RSI ranges from 55-85
What is the RSI ranges in a bear market
Ranges from 25-60
What are two types of failure swings? describe both
Top Failure swing: When a peak in RSI over 70 fails to exceed a previous peak in an uptrend (may signal a top)
-Looks like a double top
Bottom Failure swing: when RSI is in a down trend (under 30), fails to set a new low and then proceeds to exceed a previous peak (may signal a bottom)
-Looks like a double bottom
What is stochastic oscillator
-As prices increase, prices tend to be at the upper end of the price range, and in down trends price tends to be near the lower end of the range
-Measures current closing price versus defined past window of prices
When does stochastic oscillator work best?
Works best in trading range markets but still gives valuable info in trading markets
What is the score of simplistic overbought stocks in stochastics
Anything above 80
What is the score of simplistic oversold stocks in stochastics
Anything below 20
How do you use stochastics in with failure swings? Give description for top and bottom failure swings
Top failure swings: When a peak in stochastic over 80 fails to exceed a previous peak in an uptrend (may signal a top)
Bottom failure swings: when stochastic is in down trend (under 20), fails to set a new low and then proceeds to exceed a previous peak (may signal a bottom)
What are the 5 methods of analysis
1) overbought and oversold
2) divergences
3) cross-overs
4) trend identification
5) classic patterns
What is a big similarity between oscillators
-they are all similar in use, especially with overbought and oversold bounds
-multiple oscillators may give similar results
How can volume be used with price analysis?
-Volume is used as a conformational indicator b/c it is a series of price data. However volume doesn’t always confirm price patterns, although it adds value to an entry decision
What does strong momentum suggest?
Suggest a trending market (uptrend or downtrend)
What does weak momentum suggest
Suggest a consolidating market (no clear trend)
Why do analyst look at the beginning of a trending market?
Because momentum tends to lead price direction and because they are often useful in a warning of such change
When are oscillators more useful?
More useful in trading range markets as overbought/oversold indications
Why are oscillators more useful in trending markets
Because the are useful as warnings of trend change. In strong trends, they tend to be skewed in the direction of the trend and therefore fail to provide reliable entry signals
Following questions are on divergence analysis
What is market breadth indicators
it measures the internal strength of the market by considering whther stocks are gaining or losing strength in price
What are some characteristics of advance - decline (breadth) line
-best way to measure internal strength of the market index
-the cumulative sum of advancing issues minus declining ones
-Breadth line should follow and move to new highs and lows with the stock market index, if not there is a divergence which will lead to a price reversal
-this indicator may not be as strong as it was in the past
-can be calculated for any index, industry group, exchange, or basket of stocks
-calculated daily, weekly or any period but not applicable to commodities
What is the McClennan Oscillator? How is it calculated?
-It is related to advance decline
-The difference of 2 exponentil moving averages (19 & 39 day EMAs) of advances - declines
What is the score for overbought stocks in McClennan oscillator
Overbought: +100 to +150
What is the score for oversold stocks in McClennan oscillator
Oversold: -100 to -150
What is McClennan summation index
Measure of the area under the McClennan oscialltor curve by accumulating the daily McClennan oscillator figures into a cumulative index
What is the ratio adjusted summation index (RASI) used for?
It is used to factor for increases in number of issues, and oscillated between +500 (overbought) and -500 (oversold)
What is breadth thrust
-It is the ultimate buy signal
-devised the common indicator, calculating the 10 day SMA of advances divided between the sum of advances and declines when the indicator crosses zero and goes above 0.61
What does arms index measure
-measures relative volume in advancing stocks versus declining stocks
What does large volume in declining stocks indicate in arms index
The market is likely at a bottom
What does large volume in advancing stocks indicate in arms index
The market is healthy
What are up and down volume indicators made of?
Made of 90% downside days and 90% upside days
What can 90% downside days help with?
Can help with identifying major market bottoms
When do 90% downside days occur?
They occur when on a particular day the % of the downside volume > total of upside and downside volume by 90% and the percentage of downside points exceeds the total of gained points and lost points by 90%
when does 90% upside day occur?
When both the upside volume and points gained are 90% of their respective totals
When stock market index is rising, what should individual stocks be doing?
Most individual stocks should be rising to new highs
When stock market index is declining, what should individual stocks be doing?
Most individual stocks should go lower and make new lows
What is Hindenburg Omen (OH) in up and down volume indicators
Signals a reversal downward and potential crash in the market just like the Hindenburg blimp crash
what are the characteristics of number of stocks > 30 week moving average
-looks at how many stocks are trending by seeing if their price is above a N-day moving average
-30 week is usually used as a contrary indicator, overbought when > 70%, oversold when < 30%
-if >80% and declines to 60% quickly, then likely to decline to around 40% according to Ned Davis
If the market is going down, more stock are (blank) 50 week moving average
(blank) = Below
