Tuesday, October 27, 2009

Highs less lows and the respective moving averages revisited.

I know that you guys are smarter than I am, so I appreciate it when you contribute. I really appreciate the great comments.

I wanted to expand a bit more on the new highs/lows, and more particularly how they can point to a waning trend.
Sleepless noted that during a significant crash, there would be some bastardization regarding new highs/lows. And, we'd expect to see the line advance.

Please note the highlighted area. What we are looking for are divergences. Divergences are nothing really more than a "heads up" to open your peepers and be vigilant. First, note that the yellow rectangle shows first a flattening of the moving average of the net difference of new highs and new lows while the index continues higher. Second, the index and the moving average moves directionally aligned. Third, we should ask? What to expect next? I'm guessing that we'd expect to see a FLATTENING of the moving averages, no?

I also wanted to talk a little bit more about trending v. trading markets. Last summer (2008), I pulled out my 3" binder of all of the StockCharts stuff that I printed out in 2005. I actually did it in a day, and I remember clearly doing it on my deck. Somehow, I had missed the distinction of when you use oscillators v. a trend. I realized that I was having a 'moment'--a V-8 slap on the head moment. (It is also accompanied by a stain of embarrassment on one's cheeks).

Simply put, if a stock is strongly trending, your moving average and the MACD are your best friends. The MACD is going to tell you whether or not the short term trend (on either a simple or exponentially measured means) is moving further away from the long term average or closer.

If a stock is NOT trending, but rather chopping about in a range, then an oscillator is your best friend. I've seen several people in various places present charts and talk about the stochastics being pegged and a down move is soon to follow. When the down move does not come, then there's mumbling/grumbling about the PPT or what have you. In a strongly trending market, oscillators can stay pegged in either overbought OR oversold territory for some time.

There's a helpful tool called the ADX, or the Average Directional Index. You can read about it here. I used to have something taped to my monitor to REMIND me to look at the ADX if I could not discern trend. If the ADX was rising, I'd look to the moving averages. If the ADX was stalled, I'd look at an oscillator.

Your handy source for technical indicators is here. Understand how indicators are crafted and what is a leading v. a lagging technical indicator (just as you ought to know those things for economic indicators!)

12 comments:

Anonymous said...

thanks for the public acknowledgement, Leisa. I tend to visit in waves, and comment on older posts, where any value-add is probably not seen by TLC (The Leisa Cult!). Now it's my turn to go noodle on your post...

~ Sleepless

Anonymous said...

"Understand how indicators are crafted and what is a leading v. a lagging technical indicator (just as you ought to know those things for economic indicators!)"

But those shift too, just like employment is not a lagging indicator for this type of recession! So, like in all things, you have to THINK. BR pointed out the problem with looking at new lows yesterday, mirroring my comments and lo and behold Louise Yamada herself says that the indicators can break down and fail to provide correct signals.

I think this is especially true today. This market has run heavily on emotion and technicals and is prone to reversals because of it. How do you capture the "earnings are no longer good enough you need sales growth" shift that just took place?

Anyway, we could see a significant technical break today. Good luck and good trading.

MarkM

Leisa said...

MarkM...there are no magic bullets, are there? I found the Louise Y interview very compelling.

The emotion of the market: Hope that things are not as bad as they say. I'm fairly short. I did close out some NOV SPY 110 puts yesterday. I'm 1/2 expecting a run up--one last gasp--before month end, but that may not come to pass. Good trading and thanks for the comment.

Anonymous said...

Hey, L, I wanted to know if our friend the dividend investor took advantage of the Spring sell-off to stock up. There were some unbelievable yields for awhile. Can't remember her handle. ( I'm getting old.)

MarkM

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