Questions relating to Technicals that have been asked by some of our members:
the TICK is simply the number of shares, whose last tick was up minus the number of shares, whose last tick was down. It is based upon the NYSE and can be calculated on a short or a longer term time basis. A TICK value of zero would indicate that the number of advancing stocks is directly matched by the number of decliners. It, therefore, follows that a large positive no. indicates a large amount of advancing stocks compared to decliners, as would be seen in a largely bullish market. Likewise, a large negative no. indicates a large number of decliners vs advancing stocks, as would be likely in a bearish market. The TICK is a relatively simple indicator, but does have its uses, in combination with other indicators, to act as akind of lead indicator, warning of either potential tops or bottoms in the market, on a short or longer term basis.
Moving on now to the TRIN, sometimes also known as the ARMS index after its founder, Richard Arms. The TRIN is kind of a volume weighted TICK, in that it is a ratio calculated as the ratio of advancing to declining stocks over the ratio of volume of advancers to the volume of decliners. A TRIN of 1 would indicate a broad market equilibrium. A figure below 0.75 indicates that buyers are being more aggressive, whilst a figure greater than 1.25 indicates that sellers are becoming more prevalent in the market. The TRIN is to be used as another indicator of potential market moves i.e. just because the TRIN is , say, at 0.50 doesn't necessarily indicate that the market is bullish. If it has moved from say 0.40 to 0.50 it could indicate a market coming off the boil. Likewise, a TRIN value of 1.50 doesn't have to indicate a bearish market. It could show a market turning from bearish to a more neutral or even bullish stance, if, say, it moves from 1.70 to 1.50. So, this indicator, like the TICK, needs to be taken in context and is used as a supportive tool for trading decisions based upon more fundamental or technical price action.
As ever, technical analysis is a timing tool and these indices can be used as part of an overall technical picture, but should not be taken as gospel. What they can do is re-inforce or temper a view on a market and, as such, should be followed and analysed by individuals to see how they can relate and aid their individual trading styles.
I hope this starts to help those of you, who may have been a bit in the dark.
Potter.
Yes, it's generally considered to be bearish as it merely reflects the inherent psychology of the market ie traders wanted to take the mkt higher - it did move higher, but turned around and retraced all of its move. A potential sign that all is not well ! What u then need to see though is momentum to the downside. The upthrust is particularly useful at the end of a trend and can often signal that the market is running out of steam with a clear rejection of the new high. If the market then moves sideways however, this could just indicate that the mkt has hit a technical level and is now unloading some of the long posns in the mkt b4 attempting another push higher. So, the upthrust is a useful indicator, but as with everything it needs to be considered with other indicators at the same time.
Different traders can have differing views on a trade depending on their time horizons. When discussing the Euro/$ exchange rate, for example, it's important to realise that there are various factors at work, some short term and some longer term in their nature. How you view the rate really depends on your time horizon ....
The medium/longer term view is that for structural reasons the dollar is likley to depreciate vs the Euro - mainly because of the deficit the US runs versus the rest of the world. I don't know one economist who doubts that the dollar should weaken over time as it will take a long while before this deficit problem disappears. Put simply, US imports are likely to outweigh US exports for the forseeable future and to 'finance' this deficit it's not unreasonable to expect a lower dollar over time.
However, as we know markets don't go in one direction the whole time. I've been a seller of the Euro ever since it failed to break and hold the 1.1625/35 zone on 25th June ( the day the Fed moved). Technically, this was significant coupled with the previous double top pattern up at 1.1930/32. Just as the S+P got over-extended recently and had to see a retracemement into the 965-955 value zone before moving higher, the Euro had gone too far too fast and itself needed a technical retracement before resuming its uptrend. Taking out the 1.1372 level has seen another shorter term support level broken as Euro/Yen has sold off for the reasons mentioned in today's 'Technicals'. I'm looking at 1.1048 as a longer term buying level.
There's nothing wrong with trading against one's longer term view in the shorter term - it doesn't change what we fundamentally believe is going to happen longer term. All we are trying to do is exploit some shorter term moves, using technical levels to set tightish stops, which if triggered limit losses, but if the trade goes our way enables us to increase overall returns. Currency markets can change sentiment very quickly and if being traded on a short term basis need constant attention. Personally, if it's not possible to watch them very closely, I'd stick to trading on a medium term view, based upon longer term technicals and real fundamental drivers. As I said at the top, it all depends on one's trading style/time horizon !
To be honest u can use whatever high and low u like when trading short term, but using the high and low of the day is a favoured method or, given that the trading day is split into two mini sessions ie morning and afternoon with a lull at midday, you could use the high and low of the morning or afternoon as levels. Remember when trading with short term horizons like that though you will be up against all the market makers on the spot desks in the City who are likely to have the edge given the info they see from flows in the market. It's not to say you can't make money like that - it's just a different trading methodology ! Oh yes - remember to give yourself a bit of 'wiggle' room - currencies have a tendancy to over/undershoot their technical levels for brief periods of time !
In reality you can use whatever high and low you like when trading short term, but using the high and low of the day, or previous day, is a favoured method for intra-day trading or, given that the trading day is split into two mini sessions ie morning and afternoon with a lull at midday, you could use the high and low of the morning or afternoon as levels. Remember when trading with short term horizons like that though you will be up against all the market makers on the spot desksin the City who are likely to have the edge given the info they see from flows in the market. It's not to say you can't make money like that - it's just a different trading methodology !
Also, remember to give yourself a bit of 'wiggle' room - currencies have a tendancy to over/undershoot their technical levels and it would be a shame to miss out on a trade for the sake of a couple of 'pips' !
Maybe the MAs that you are using are Simple MAs and are what they say they are ie simple ! For the 40 day for example the latest figure will be the total figure for the last 40 days divided by 40. If you look at the exponential MAs on the other hand they will give different readings. Exponential MAs 'weight' the lastest readings of the underlying price - ie today's price is given more weight or significance when calculating the average today than the price say from 35 days ago. This makes sense since a lot can happen in a relatively short period of time and is why all the funds will look at weighted or exponential moving averages. Given their power in the marketplace it makes sense to look at indicators they follow.
MAs are of use to a trader as either confirmation signals or to keep a trader in a position, by using the MAs intelligently to give ideas of where to place stops. MAs should only be used in trends, not in sideways trading markets unless used in conjunction with other indicators. All they are are graphical representations of mathematical truths and as such they can be used to give traders signals eg a short term MA cutting a longer term MA from below can be considered an indication of a new bullish trend, but given the lags involved in the calculation MAs by definition will miss the start of new trends i.e. will get u into a position after the low and will get u out after the high. However, if used intelligently they can keep u in a position and allow u to ride a trend with great effect.
Re short/long MAs crossing - the long MA is the reference and the shorter MA gives the signal - if u think about it that has to hold mathematically !
Different traders use different periods for their MAs - common ones used are all 'harmonics' of shorter ones eg 10d, 20d, 40d and the two most commonly looked at longer term MAs are 100d and 200d and the 52 week. Remember, they are nothing mystical and like all technical analysis they only work if other market participants are looking at a similar thing ! Also be aware of false moves/breaks of MAs - as with other indicators always try and back them up with some other technical indication of a move.
Hope this helps u a bit when looking at MAs !
The use of the word 'technical' has two meanings :-
From looking at the charts/longer term moving averages the Euro looks to be in the driving seat, however, we're big believers in tying the chart situation up with fundamentals and in the case of the Euro this is the driving force. When I refer to it not being for yield reasons I refer to various Muppets at certain financial news stations who constantly simplify this appreciation without understanding the real driving forces behind such a move. These so called market commentators are just looking at the fact that the ECB repo rate is higher than the targetted Fed Funds rate and so they are under the impression that investors literally sell their dollars, buy Euros and put their Euros on deposit at a higher rate. Unfortunately, although it would be nice were the world as simple as this, it is not ! What is happening, and has been considered for a number of years now is that large natural holders of dollar reserves eg certain Middle Eastern sovereign reserves and large central bank dollar holdings are now gradually being diversified into other 'major' currencies, notably the Euro. Now, at the launch of the Euro there were a lot of central bankers looking to do this. However, the lack of confidence in the ECB policymakers was reflected in the Euro's weakness for the early part of its life and these important investors were not that keen to move reserves into a 'weak' currency. Over the recent past though we've seen a lot of 'jumping on the bandwaggon' as there have been some large shifts out of dollars and into Euros for this very reason as everybody pulls the trigger at once ! The other point to bear in mind is that a large proportion of these dollar reserves are invested in the dollar denominated bond market. As the economic situation has started to improve in the US and fixed income assets have suffered some of these dollar holdings have been moved into areas of the world where the economic situation is more benign. One could argue that this is the real 'yield' play. Euro fixed income assets have had an underlying bid since the Euro zone is in dire straits and investors feel rather more confident holding Euro denominated bonds cf. their dollar counterparts. A virtuous cycle results as more flows into bonds causes yet further gains in the Euro. This appreciation is further enhanced as Euro equities gain ground at the same time.
So, the situation is not as simple as just taking the rate differential between official money market rates. The fact that there is a 'technical' shift in reserve holdings spurred on by the fact that this pent up diversification demand has been around for a long time has caused the Euro appreciation. As a result the chartists also have good reasons to buy Euros and the dollar current account deficit merely adds fuel to the fire.
This is why I refer to the Euro appreciation as technical - for both of the technical reasons !
An outside day is a technical expression to denote a daily range, which is greater than the previous day's range i.e. a higher high and a lower low than the previous day.
An inside day should have a range that falls within the boundaries of the previous day's (or any other time period's) bar. An inside day indicates indecision or an unresolved battle between the bulls and bears. As for its significance, it should be seen as an alert or an alarm bell to a potential/impending move. Of far greater significance, as far as I'm concerned, is an 'outside'day because this indicates a real battle going on AND it also gives you an indication of probable direction with either a lower or a higher close vs the previous session.
The outside day has a pretty good track record and can be a powerful signal if u cotton on to the pattern early in its formation.
As with everything in technical analysis, it needs to be confirmed with other signals, but it's certainly one of the more useful indicators around !
A gap in itself is a powerful signal and often a market will either retrace half or all of the gap before continuing in the direction of the gap movement. In this situation it's relatively straightforward to place stops in case the gap is a false move.
Quote from this morning's 'Technicals' : " For those of u keen on trading the FTSE, as I mentioned in this morning's Technicals, be very careful of getting sucked into a vacuum ! We've seen a 90 point bounce from this morning's low and, technically, it is a strong rejection of this low seen down at support in the 3655-65 zone. This price action could well be drawing out a 'downthrust', as yet to be confirmed and for those of you into Candlesticks - could it be 'hammer time' on the Hourly chart ??? "
In Candlestick charting a 'hammer' looks just like a, well, just like a hammer - that's how it got its name !! It is considered as an indicator of a potential trend change, so needs to be used in conjunction with other technical indicators for confirmation.
If u take a look at the S+P on a Weekly chart and go back to the low in July '02 you'll see that the preceeding 9 weeks were all either 'down' weeks or 'unchanged' weeks and then we got the hammer signal and a 4 week rally.
So, it can be a useful signal and indicate trend change, yes !
There are no hard and fast rules and different traders use different averages. As a result it's really a case of finding what works best for you. Some guys I know use very weird averages like 23d and 47 day, for example. They use these on the back of what has fitted their trading systems in the past. Personally, I favour the more common MAs - ie those that a large amount of traders use.
Given that technical analysis is to some extent self-fulfilling, it makes more sense to me to look at levels, which the market as a whole will consider important, rather than coming up with other MAs.
So, we use 10, 20, 40, 100 and 200 period MAs as indicators - nothing is cast in stone in the technical analysis field and there's nothing to stop you using a 90 period MA if u want to ! 100 and 200 MAs are commonly used as longer term indicators by traders. The shorter periods are all tied in by harmonics (similar concept to radio waves) eg 20 = 10x2 and the 40 = 20x2 etc - btw 80 is not very commonly used - 100 is preferred !
Hope this helps, but as I said earlier - if u wanna try out a 90 period MA, there's nothing to stop u - it's just that we've used the MAs outlined above for a long time with some good success, so it'll take a lot to change the old spots !!
Yes, it does indeed swap around ie a support once breached will become a resistance and vice-versa. This can be known as an 'Ice Line' and it can develop into a level which represents alternate support and resistance over time, given the market's tendancy to remember such levels !
One important point to remember vis-a-vis support/resistance levels is that if they are breached, but only on a spike and the market retraces they will then remain as before.
An outside day implies that the market has tried the downside, run into decent support, the shorts have been squeezed by the longer term bulls and now some of those that went short are now jumping on the bandwaggon and going long. If we then see a higher close versusthe previous day, traders generally take this as a bullish signal and will look for the market to push on higher during the following day's session.
Spotting the reversal/potential reversal in the market down at the lows or sensing that the market psychology/sentiment is turning is how the most money is made out of this pattern, but, it can be difficult to see early on ! The sooner it is spotted, the sooner u can get in - but, if u miss it don't despair because u can still get in later and use stops, as ever, to ensure you don't get caught in a false move or a moveyou may have mis-diagnosed !
The reverse of the above is true for an outside day with a lower close compared to the previous day - ie it could lead to a lower day on day 3.
This 'outside day' idea can also be applied to shorter and longer time periods e.g hourly or weekly bar charts.
As with most technical indicators this is not cast in stone, but is something you can use as an alert to a potential change in market sentiment !
Several of our newer members, as well as some of the more long standing members, have asked what the TICK and TRIN are and what is their importance.
So, here goes :
the TICK is simply the number of shares, whose last tick was up minus the number of shares, whose last tick was down. It is based upon the NYSE and can be calculated on a short or a longer term time basis. A TICK value of zero would indicate that the number of advancing stocks is directly matched by the number of decliners. It, therefore, follows that a large positive number indicates a large amount of advancing stocks compared to decliners, as would be seen in a largely bullish market. Likewise, a large negative number indicates a large number of decliners vs advancing stocks, as would be likely in a bearish market. The TICK is a relatively simple indicator, but does have its uses, in combination with other indicators, to act as a kind of lead indicator, warning of either potential tops or bottoms in the market, on a short or longer term basis.
Moving on now to the TRIN, sometimes also known as the ARMS index after its founder, Richard Arms. The TRIN is kind of a volume weighted TICK, in that it is a ratio calculated as the ratio of advancing to declining stocks over the ratio of volume of advancers to the volume of decliners. A TRIN of 1 would indicate a broad market equilibrium. A figure below 0.75 indicates that buyers are being more aggressive, whilst a figure greater than 1.25 indicates that sellers are becoming more prevalent in the market. The TRIN is to be used as another indicator of potential market moves i.e. just because the TRIN is , say, at 0.50 doesn't necessarily indicate that the market is bullish. If it has moved from say 0.40 to 0.50 it could indicate a market coming off the boil. Likewise, a TRIN value of 1.50 doesn't have to indicate a bearish market. It could show a market turning from bearish to a more neutral or even bullish stance, if, say, it moves from 1.70 to 1.50. So, this indicator, like the TICK, needs to be taken in context and is used as a supportive tool for trading decisions based upon more fundamental or technical price action.
As ever, technical analysis is a timing tool and these indices can be used as part of an overall technical picture, but should not be taken as gospel. What they can do is re-inforce or temper a view on a market and, as such, should be followed and analysed by individuals to see how they can relate and aid their individual trading styles.