Arms Ease of Movement
Developed by Richard W. Arms, Jr., this analysis routine expands on Mr. Arms'
Equivolume charting tool by quantifying the shape aspects of the plotted boxes. The
purpose of this quantifying is to determine the ease, or lack thereof, with which a
particular issue is able to move in one direction or another. The ease with which an issue
moves is a product of a ratio between the height (trading range) and width (volume) of the
plotted box. In general, a higher ratio results from a wider box and indicates difficulty
of movement. A lower ratio results from a narrower box and indicates easier movement. This
ratio is then related to a comparison between today's and yesterday's trading-range
midpoint values to determine the ease of movement value (EMV). A moving average is then
applied to the EMV value - the moving average period can be varied in order to make the
EMV flexible as a trading tool.
Average True Range
True range is the greatest of the following differences:
- Today's high to today's low
- Today's high to yesterday's close
- Today's low to yesterday's close
The range is normally the "high - low". However, any time the value of
yesterday's close is not within the range of today's bar, rule b) or rule c) applies. As
with most other indicators, the periodic value is summed and smoothed to create the final
indicator.
Bollinger Bands
Bollinger Bands plot trading bands above and below a simple moving average. The
standard deviation of closing prices for a period equal to the moving average employed is
used to determine the band width. This causes the bands to tighten in quiet markets and
loosen in volatile markets. The bands can be used to determine overbought and oversold
levels, locate reversal areas, project targets for market moves, and determine appropriate
stop levels. The bands are used in conjunction with indicators such as RSI, MACD
histogram, CCI and Rate of Change. Divergences between Bollinger bands and other
indicators show potential action points. As a general guidline, look for buying
opportunities when prices are in the lower band, and selling opportunities when the price
activity is in the upper band.
Commodity Channel Index (CCI)
The CCI is a timing system that is best applied to commodity contracts which have
cyclical or seasonal tendencies. CCI does not determine the length of cycles - it is
designed to detect when such cycles begin and end through the use of a statistical
analysis which incorporates a moving average and a divisor reflecting both the possible
and actual trading ranges. Although developed primarily for commodities, the CCI could
conceivably be used to analyze stocks as well.
Forumla: CCI=(M-MAVG)/(0.015xDAVG)
M=1/3 (H+L+C) H=Highest price for a period L=Lowest price for a period C=Closing price
for a period MAVG=N-period simple moving average of M DAVG= 1/n x SUMi=1 to n
(ABS(MI-MAVG))
Commodity Selection Index
The Commodity Selection Index is related to the Directional Movement Index. Whereas the
ADXR plot of the DMI is used to rate contracts from the longer term, trend-following point
of view, the CSI is used to rate items in the more volatile short term. The Commodity
Selection Index takes into account the ADXR from the Directional Movement Index, the
Average True Range, the value of a one cent move as well as margin and commission
requirements. The higher the CSI rating, the more attractive an item is for trading.
Cutler's RSI
Cutler's RSI is a slight variation of Welles Wilder's original Relative Strength Index.
The RSI is a momentum oscillator used to identify overbought and oversold conditions by
keying on specific levels, generally 30 and 70, on a chart scaled from 0 to 100. The study
can also be used to detect the following:
- Movement which might not be as readily apparent on the bar chart
- Failure swings above 70 or below 30 which indicate reversals
- Support and resistance
- Divergences between RSI and price
Cutler's RSI is calculated as follows:
- RSI = 100 - (100 / ( 1 + RS ) )
-
- RS = UPAV:x / DNAV:x, and . . .
- UPAV:x = (E, period's Closes UP) / period
- DNAV:x = (z: period's Closes DOWN) / period
- A Close UP (or DOWN) = CLOSE - CLOSE previous
If the difference is positive, it is a Close UP. If the difference is negative, the
sign is changed and it is a Close DOWN.
Demand Aggregate
The Demand Aggregate is used similarly as the Demand Index but adds Open Interest as a
consideration in the formula. In its simplest terms, the system confirms price trends by
analyzing concurrent Volume and Open Interest trends. For example, a rise in price,
coupled with rising Volume and Open Interest figures, is considered a bullish indicator.
Interpretations are made with respect to the relationship between the movement of Volume,
Open Interest, and Price.
Haurlan Index
This indicator is calculated daily from the plurality of NYSE advances over declines.
There are three components of the Haurlan index: Short Term, Long Term and Intermediate
Term.
1) Short Term. A 3-day exponential moving average is taken of the net NYSE advances
over declines, measuring the short term condition of the market. When this index moves
above +100, a market short term buy signal is generated. The signal is in effect until the
market drops below -150 at which time a sell signal is generated. The sell signal remains
in effect until the index moves above +100 again.
2) Intermediate Term. Same as above but with a 20-day exponential moving average. This
index is considered the most important of the three. Market buys and sells are determined
in this index by the crossing of trend lines or support/resistance levels depending on the
particular market in question. For example, when the market is basing out in preparation
for an uptrend, a resistance level may be set up. Once its value is determined, buy and
sell signals could be generated for that market.
3) Long Term. Same as above except for a 200-day exponential moving average. Useful for
determining trends but not for signals.
Also can be inverted. A reversal pattern
that is one of the more common and reliable patterns. It is comprised of a rally which
ends a fairly extensive advance. It is followed by a reaction on less volume. This is the
left shoulder. The head is comprised of a rally up on high volume exceeding the price of
the previous rally. And the head is comprised of a reaction down to the previous bottom on
light volume. The right shoulder is comprised of a rally up which fails to exceed the
height of the head. It is then followed by a reaction down. this last reaction down should
break a horizontal line drawn along the bottoms of the previous lows from the left
shoulder and head. This is the point in which the major decline begins. The major
difference between a head and shoulder top and bottom is that the bottom should have a
large burst of activity on the breakout.
Herrick Payoff Index
This is a commodity trading tool, useful for the early spotting of changes in price
trend direction. The Payoff Index is best used to distinguish trends that are destined to
continue from those that will most likely be short-lived. The Payoff Index is a commodity
trading tool that is useful in the early identification of changes in the direction of
price trends. The Payoff Index frequently helps distinguish between a rally in a trend
that is destined to continue and a significant trend change that will provide a worthwhile
trading opportunity. The Payoff Index tends to give coincident signals within a day or two
before a significant change in price trend. This advance action is accomplished through
use of trading volume and contract open interest to modify the price action. Analysts have
observed that volume trends often change before a price-trend change. There are also
generally accepted relationships between the price trend and the trend of open interest.
Kagi Chart
Like Candlestick and Renko charts, Kagi charts come from Japan and were made popular in
the USA by Steve Nison. Kagi charts display a series of connecting vertical lines where
the thickness and direction of the lines are dependent on the price action. If closing
prices continue to move in the direction of the prior vertical Kagi line, then that line
is extended. However, if the closing price reverses by a pre-determined
"reversal" amount, a new Kagi line is drawn in the next column in the opposite
direction. An interesting aspect of the Kagi chart is that when closing prices penetrate
the prior column's high or low, the thickness of the Kagi line changes.
Moving Averages
The moving average is probably the best known, and most versatile, indicator in the
analysts tool chest. It can be used with the price of your choice (highs, closes or
whatever) and can also be applied to other indicators, helping to smooth out volatility.
As the name implies, the Moving Average is the average of a given amount of data. For
example, a 14 day average of closing prices is calculated by adding the last 14 closes and
dividing by 14. The result is noted on a chart. The next day the same calculations are
performed with the new result being connected (using a solid or dotted line) to
yesterday’s. And so forth. Variations of the basic Moving Average are the Weighted
and Exponential moving averages.
Norton High/Low Indicator
The Norton High/Low Indicator uses results from the Demand Index and the Stochastic
study and is designed to pick tops and bottoms on long term price charts. Two lines are
generated: the NLP line and the NHP line. The system also uses level lines at -2 and -3.
The NLP line crossing -3 to the downside is the signal that a new bottom will occur in 4-6
periods, using daily, weekly, or mnthly data. Similarly, the NHP line crossing -3 to the
downside indicates a new top in the same time frame. The indicator tends to be more
reliable using longer term data (weekly or monthly). When either indicator drops below the
- 3 level, a reversal may be imminent. The reversal (or hook) is the signal to enter the
market. For greater reliability, use the Norton High/Low Indicator together with other
studies for confirmation.
On Balance Volume (OBV)
OBV is one of the most popular volume indicators and was developed by Joseph Granville.
Constructing an OBV line is very simple: The total volume for each day is assigned a
positive or negative value depending on whether prices closed higher or lower that day. A
higher close results in the volume for that day to get a positive value, while a lower
close results in negative value. A running total is kept by adding or subtracting each
day's volume based on the direction of the close. The direction of the OBV line is the
thing to watch, not the actual volume numbers.
Formula: OBV=SUM(C-CP)/(ABS(C-CP)xV)
C=Today's Close CP=Yesterday's Close V=Today's Volume
Point & Figure Charts
The Point and Figure (PF) charting method is a technique that has been used for many
years in analyzing the variations in prices of stocks and commodities. There are several
types of PF charting methods. Some employ trend lines, resistance levels, and various
other additions to the chart. In this study, we shall be concerned with only daily
reversal type charts. The principal advantage of a PF chart is that it is much easier to
read and interpret than other types of charts. All the small, and often confusing, price
movements are eliminated, and only the most important features of the price action remain.
It would be reasonable to think of this method as a filter that (hopefully) allows only
meaningful information to enter the chart and ultimately the decision process. Two basic
symbols are used:
X Denotes the continuance of an increase in price and is always
"stacked" in the vertical direction.
O Denotes the continuance of a decrease in price and is always
"stacked" in the vertical direction.
While prices are rising X's are used. When falling, O's are used. They are always
plotted on rectangular grid graph paper such that columns of X's and O's alternate. A
Point and Figure chart is characterized by the specification of two parameters: box size
and reversal number. The box size dictates the price range associated with a particular
box (cubical area within the grid), while the reversal number specifies the conditions
which terminate a column of X's and begin a column of O's and vice-versa.
Price Patterns
Price Patterns are formations which appear on commodity and stock charts which have
shown to have a certain degree of predictive value. Some of the most common patterns
include: Head & Shoulders (bearish), Inverse Head & Shoulders (bullish), Double
Top (bearish), Double Bottom (bullish), Triangles, Flags and Pennants (can be bullish or
bearish depending on the prevailing trend).
Renko Chart
The Renko charting method probably got its name from "renga", which is the
Japanese word for bricks. Introduced by Steve Nison, a well-known authority on the
Candlestick charting method, Renko charts are similar to Three Line Break charts except
that in a Renko chart, a line is drawn in the direction of the prior move only if a fixed
amount (i.e., the box size) has been exceeded. The bricks are always equal in size.
Example: With a five unit Renko chart, a 20 point rally is displayed as four equally
sized, five unit high Renko bricks.
Stochastic
The Stochastic Indicator is based on the observation that as prices increase, closing
prices tend to accumulate ever closer to the highs for the period. Conversely, as prices
decrease, closing prices tend to accumulate ever closer to the lows for the period.
Trading decisions are made with respect to divergence between % of "D" (one of
the two lines generated by the study) and the item's price. For example, when a commodity
or stock makes a high, reacts, and subsequently moves to a higher high while corresponding
peaks on the % of "D" line make a high and then a lower high, a bearish
divergence is indicated. When a commodity or stock has established a new low, reacts, and
moves to a lower low while the corresponding low points on the % of "D" line
make a low and then a higher low, a bullish divergence is indicated. Traders act upon this
divergence when the other line generated by the study (K) crosses on the right-hand side
of the peak of the % of "D" line in the case of a top, or on the right-hand side
of the low point of the % of "D" line in the case of a bottom. Two variations of
the Stochastic Indicator are in use: Regular and Slow. When the Regular plot of the
Stochastic too choppy, the "Slow" version can often clarify the results by
reducing the sensitivity of the calculations. The formula is:
Note: 5 Days is the most commonly used value for %K
%K=100 {(C-L5)/(H5-L5)}
The %D line is a 3 day smoothed version of the %K line
%D=100(H3/L3) where H3 is the 3 day sum of (C-L5) and L3 is the 3 day sum of (H5-L5)
Stoller STARC Bands
STARC bands create a channel surrounding a simple moving average. The width of the
created channel varies with a period of the average range; thus the name ('ST' for
Stoller, plus 'ARC' for Average Range Channel). STARC Bands, in a fashion similar to
Bollinger Bands, will tighten in steady markets and loosen in volatile markets. However,
rather than being based on closes, the STARC Bands are based on the average true range,
thus giving a more in depth picture of the market volatility. While the penetration of a
Bollinger Band may indicate a continuation of a price move, the STARC Bands define upper
and lower limits for normal price action.
Trading Index
This index (also kown as the "Arms" index, or "TRIN") measures the
relative strength of volume associated with advancing stocks against the strength of
volume associated with declining stocks. When used as a short term indicator, readings
below 1.0 are considered bullish while readings above 1.0 are considered bearish. An
extreme bearish reading would be 1.5 or higher; an extreme bullish reading would be .5 and
lower. Readings of 2.0 or .3 would be considered "climactic". For the
intermediate term, a bearish sign is an index over 1.0, bullish under 1.0. For the long
term, the Trading Index can be viewed as an overbought / oversold indicator.
Volatility
This analysis is based on the idea that stocks bottom from "panic" selling,
after which a rebound is imminent. One way of measuring this phenomenon is to observe a
widening range between high and low prices each day. In general a progressively wider
range, observed over a relatively short period of time, can indicate that a bottom is
near. Price tops are generally reached at a more leisurely pace and can be characterized
by a narrowing of the price range. This measure of the trading range takes place over a
specified period in order to determine whether or not an issue is being "dumped"
and is approaching a bottom. A pre-requisite to a valid bottom is an increase in the
volatility line above the reference line. In a similar manner, an indication of an
imminent top would be a decrease in the volatility line below the reference line. As long
as volatility is rising, in all probability a stock will not approach a top. It should be
noted that this study should be used in conjunction with trend following analyses and
momentum oscillators for confirmation and accuracy.
