Enter the Rate of Change Indicator
June 26, 2009 by admin · Leave a Comment
The rate of change indicator certainly proved its worth between 1995 and 2004. For starters, in its patterns of movement, the indicator clearly reflected the A-B wave sequences that took place during this period. Rate of change measurements frequently provide advance notice of market reversals, reversing direction before rather than after or even simultaneously with the trend of stock prices. As a general rule, rate of change indicators peak approximately 50-65% into a market upswing. The area at which these indicators turn down is an area in which it is probably too late for buying, possibly a touch early for selling; this is an area during which it might be appropriate to prepare for the next downside move.
As you can see, every cyclical peak that took place between 1995-2000 was presaged by a negative divergence, with prices rising to new highs, the rate of change indicator turning down to reflect diminishing upside price momentum. This characteristic, in reverse, was also present during the market declines of 2000-2002, with cyclical market lows characterized by advance positive divergences and the rate of change indicator reversing to the upside as prices moved toward their final lows. The 50-day rate of change indicator provided a fine notice of market rallies that developed in late 2001 and 2002.
Investors received clear notice of market recoveries that took place based upon the 18-month cycle, notice provided by the cyclical lengths and by the action of the 50-day rate of change indicator.
Time Cycles: Four Days to Four Years
June 25, 2009 by admin · Leave a Comment
Although they are not always apparent, there are a number of fairly regular wave patterns in the movements of stock prices that appear to be based upon time. There seem to be regular and repetitive cyclically determined time periods between low points, which is how cycles are defined. Frequently there are equal lengths of time from highs to highs as well within full market cycles, generally during neutral market periods, but cycle lengths are normally measured from lows to lows of market cycles.
The Presidential Stock Market Cycle
June 25, 2009 by admin · Leave a Comment
This is a well-known, though hardly flawless, stock market political cycle. Basically, the stock market’s best performances take place during the years that immediately precede the years of presidential elections. Its second-best annual gains tend to take place during the years of presidential elections, with the stock
market often peaking shortly after the elections held during those years. The worst years for the stock market have been the years following presidential elections. For example, positive stock market returns were achieved during every pre-election year but one since 1948. The same ratio of success has almost existed for election years (although the year 2000 was a notable failure), but gains during election years have not generally been as great as gains achieved during pre-electio years. Post-election years and midterm years have produced only modest nr returns to stockholders throughout the years. In fact, some portfolio manage] maintain portfolios in equities only during years that are normally favorable for the presidential market cycle; they turn to interest-producing instruments during the remainder of the time.
This is, again, an indicator that has been highly reliable over the long run by one that has been prone to error in certain years. For example, the stock mark, advanced during the first year of President Reagan’s second term in office (198E during the first year of President Bush’s term in office (1989), and again during the first years of President Clinton’s two terms of office (1993 and 1997), but the year after election hangover returned with the election of George W. Bush, whose fir full year in office (2001) was marked by a serious extension of the 2000-2002 be market.
Evaluating the Tabulations
June 24, 2009 by admin · Leave a Comment
Although gains were recorded in most months during both the favorable unfavorable six-month periods, there has been a considerable difference in magnitude of the average gain achieved during favorable seasonal periods unfavorable periods. (Stocks advance approximately 75% of the time but, apparel there are advances and, then again, there are advances.)
Returns during unfavorable six-month periods have averaged just a bit than 1% per period, with the rate of return while invested approximately 2% annum, less than risk-free interest rates in most years. As a rule, investors which have been better off in the stock market for just six months each year and six months than being fully invested at all times (although this is not true for every year, of course).
The performance of this seasonal six-month period timing model has been essentially similar to the Nasdaq/NYSE Index Relative Strength Indicator and the 3- to 5-Year Monetary Indicator, which also produce virtually all net market gain within defined and limited holding periods. These “mood indicators” are not precise on their own in terms of market timing, however, so they are probably best employed as an influential backdrop to inveshnent decisions based upon more specific timing tools or as a consideration for decisions regarding the extent to which you want to be invested at any time.
There certainly do appear to be significant differences in performance between the favorable and unfavorable six-month periods.
Early Warnings Provided by Channel Patterns
June 24, 2009 by admin · Leave a Comment
Channels of this nature often provide advance notice of a change in the character of the stock market. For example, notice the nature of the series of recoveries that took place between April and early July whenever the midline of the channel the primary trendline, was approached. Rallies during April and May were almost instantaneous. The rally in early July required a little more than a week of bas building before the Composite could reach the top of channel; when prices did reach the top of the channel, they backed off quickly rather than running upward along the channel as they had done in June.
The recovery that started in mid-July never made a serious attempt to reach the upper boundary of the channel. Prices moved upward at a very moderate slop before they declmed, for the first time since March, through the supporting, mic channel trendline. In tl& case, the diminishing slope of the recovery, coupled with the failure over two weeks to reach the upper boundary, warned of the incipier breakdown.
The capability of stock prices to rise rapidly to and to even overshoot the upper boundary of a trading channel suggests a favorable market climate and high prices to come. Diminished slopes of advance and failure to reach the upper boundary suggest incipient market weakness.
New Lows at a Developing Stock Market Bottom
June 21, 2009 by admin · Leave a Comment
In a similar but converse vein, reductions in the number of stocks falling to mellows as market declines proceed represent positive breadth divergences; intern; market strength improves as price levels decline.
A major stock market bottom formation developed between the summer of 2002 and March 2003, a bottom formation characterized by three downside spikes in the Standard & Poor’s 500 Index-& spikes in the number of issues falling to new lows.
However, whereas the Standard &Poor’s 500 Index traced out one lower low an another nearly lower low during this period, the number of issues declinmg to near 52-week lows in price contracted sharply between the lows of July 2002 and March 2003. Although the Standard & Poor’s 500 Index stood at almost the exact level in March 2003 as it had been at the lows of July 2002, the number of issues falling 1 new lows had shown a decline from more than 900 to slightly more than 301 Clearly, the stock market was building internal strength, a precursor to the bull ma ket that soon ensued.
A summary of the basics follows:
Market advances accompanied by increases in the number of issues reaching new highs in price are advances that are well confirmed by market breadth. Such advances are likely to continue. Market advances that are not accompanied by increases in the number of issues reaching new highs in price are not as well grounded in internal strength as fully breadth-confirmed market advances. There are no precise and regular intervals in time between peaks in the number of new highs and ultimate peaks in the stock market averages. For example, in less than a year, the summer decline in 1998 followed peaks in new highs that had developed during 1997, whereas the fuU-scale bear market of 2000-2002 did not begin until more than two years after the 1997 peak in new highs. As a general rule, significant peaks in new highs tend to be seen perhaps one year or so before final bull market peaks.
Market declines accompanied by increasing numbers of issues falling to new lows are likely to continue. If new lows reach bear market peaks during a downside selling climax, with prices spiking down at the time, there are likely to be further tests of those price and breadth lows before final bear market bottoms are achieved.
Failures of new lows to expand with price declines represent positive breadth divergences and tend to be forerunners of stock market reversals to the upside. Again, breadth divergences, positive and negative, do not signal immediate market reversals. This family of indicators usually requires time for its effects to be felt. However, triple-bottom formations, representing declining numbers of new lows during bottoming formations, often resolve in market advances fairly rapidly after the third spike reversal has taken place. The market bottom that developed during 2002 is an excellent example.
As a general rule, the stock market prefers positive breadth unanimity during market advances: high percentages of issues reaching new highs in price, and low percentages of issues falling to new lows. (At market tops there are often high levels of issues makimg both new highs and new lows, reflective of very split market breadth. When the number of new highs and the number of new lows on the New York Stock Exchange both amount to more than 5% of the total number of issues traded on that exchange, serious market declines frequently, though not always, follow shortly.) A useful indicator that measures the level of positive breadth unanimity can be maintained by dividing the number of issues reaching new highs in price by the total of issues reaching new highs and falling to new lows. For example, if 100 issues reach new highs on a given day and 25 issues fall to new lows, you can divide 100 (new highs) by 125 (sum of 100 new highs plus 25 new lows) for a daily ratio of 30, or 80%. Single-day readings can be beneficially employed, but the maintenance of a ten-day simple moving average of daily readings smoothes the data.
New High/New Low Confirmations of Price Trends in the Stock Market
June 14, 2009 by admin · Leave a Comment
We have already reviewed concepts relating to confirmation and non-confirmation of price advance and decline by indicators that measure market momentum, such as rate of change measurements. Among these are concepts related to positive divergence and negative divergence, based on the relationships between momentum and price movement.
Concepts related to confirmation, non-confirmation, positive divergence, and negative divergence can be related as weU to the relationship between external price strength and measures of the internal strength of the stock market. For example, if the number of stocks that reach new highs expands with gains in market indices, we can think of this as a positive confirmation of market advance: Internal strength measurements are confirming extemal strength measurements. However, if the number of issues making new highs does not keep pace with gains in the market averages, internal strength can be thought of as underperforming the extemal stock market. Negative breadth divergences are taking place, a warning of probable trouble down the road.
Conversely, if price levels remain down trended but fewer issues fall to new lows along with weighted price indices, this divergence could be evidence of internal strength building in the stock market as external indicators continue to weaken. Such conditions reflect positive breadth divergences, situations in which more stocks are finding support even within the context of declining price averages, usually a bullish portent.
New Highs and New Lows
June 6, 2009 by admin · Leave a Comment
Another indicator reflects market breadth, a measure of the true internal strength (or weakness) of the stock market. nus is the new high/new low indicator, including various derivatives of the related data. The number of issues making new highs, measured on either a daily or a weekly basis, is the number that reach new 52-week highs in price at any time on a given day or, for weekly-based readings, at some point during the week. This would be a price level higher than any level recorded in the previous 52 weeks. The number of issues falling to new lows refers to the number of issues whose prices have declined to their lowest level in the most recent 52 weeks.
It goes without saying that it is more positive when large numbers of issues advance to new highs than when the numbers of stocks in rising trends diminish. It is more negative when large numbers of issues keep falling to new lows than when increasing numbers of stocks find support, perhaps beginning new uptrends.