At the same time, we want to explain the technical methods we use in analyzing the markets. This selling will cause the market to stop just below the resistance level itself. This is because market participants will realize that the government has lost control of the market and that a new price trading range is being established.
For example, a 10-day simple moving average (MA) is the average of the closing prices for the last 10 days. See e.g. Figure 3 is a daily bar chart of the June T-bond futures contract with its 9-day moving average overlaid. Notice how the T-bond price crossed above the 9-day moving average in late October, generating several winning trades in the direction of the trend.
The choice of the moving averages used in an oscillator is dependent on a trader's time frame and on the optimal value for a particular market. One characteristic of the RSI is that it moves more slowly when it reaches very overbought or oversold conditions, then breaks back very quickly when the market enters even a mild correction. Rather, one should start the calculation in the first 9 days of the contract and then continuously update it from there.
There are two basic ways to use the RSI, (1) as an overbought/oversold indicator and (2) as a way to spot divergences between the movement of the RSI and the price of the underlying instrument. RSI is very useful to get an insight into the overbought/oversold condition of the market. The stochastic indicator is based on the observation that as the price of an instrument rises, daily closes tend to be closer to the upper end of the recent price range.
Conversely, as price falls, daily closes tend to be closer to the bottom of the recent price range. The stochastic values simply represent the position of the market on a percentile basis relative to its range over the previous n-day sessions. For example, if the price of the instrument continues to rise to new highs, but the %D line does not continue to reach new highs as well, this is a bearish signal and indicates that the bull trend may be waning.
However, on the floors of the Chicago exchange, the Pivot Point is defined as the average of the previous session's high, low and settlement prices. The general rule is that volume should increase in the direction of the existing price trend to confirm that trend. Open interest is the total number of outstanding futures contracts that exist at the end of the day.
The change in open interest is a measure of whether money flows into or out of the market.
STOCK MARKET INDICATORS Advance/Decline Line
A low OB/OS value indicates a broad bear market in the stock and suggests that the decline has been sharp enough to trigger a technical correction. The Advance/Decline volume line is essentially the same as the Advance/Decline line, except that the A/D volume line uses the up-minus-down volume instead of the up-minus-down number of the A/D line. However, a flat or declining A/D volume line in a bullish market constitutes a divergence and indicates that the volume of rising issues is drying up and possibly signals a downside correction.
The significance of the strength in the A/D volume line during the February 1998 / April 1998 bull run was that most of the volume in the stock market was concentrated in the advancing issues and the volume of the weak issues was low. This was a sublime sign, as it indicated that both volume and demand were flowing into the advancing releases and that the declining issues were being left relatively alone. TRIN is based on the assumption that the direction and level of volume are leading indicators for the stock market.
A TRIN of 1 is considered neutral because it means that the up/down volume and up/down number of emissions both move in the same direction in equal proportions. Note that the value of the comparative strength indicator is based on day #1 as a reference point, which means that the absolute value of the indicator is not important; only its relative value is important. Rising CSI - A rising CSI reading shows that the Dow Industrials Index is outperforming the S&P 500.
In a bull market, a rising CSI value indicates that the Dow is rising faster than the S&P 500 and that the Dow is leading the market higher. In a bear market, a rising CSI value indicates that the broad S&P 500 market is falling faster than the Dow and that the broader market is leading the Dow lower. In a bull market, a falling CSI value indicates that the Dow is rising more slowly than the broader S&P 500 market and that the S&P 500 is leading the Dow higher.
In a bear market, a falling CSI value shows that the Dow is falling faster than the broader S&P 500 market and that the Dow is leading the broader market lower. It showed the Dow taking over the leadership position as the market went into a sideways trading pattern. This indicated that the market was concerned about the quality of earnings in the broader market and was attracted to the blue-chip companies.
NYSE INDICATORS
The Call/Put Ratio is an overbought/oversold market sentiment indicator that uses volume data from call/put options in the stock market. Optima charts and plots the daily call/put ratio as well as the 10-day moving average of the ratio. It should be noted that this is the call/put ratio, not the put/call ratio traditionally used by stock market technicians.
Optima uses the call/put ratio so that the indicator is conceptually consistent with other overbought/oversold indicators with a high value for an overbought condition and a low value for an oversold condition. The interpretation of the call/put ratio is essentially the same as for the bullish consensus. A very high call/put ratio is considered low because it indicates that investors are trading too many calls and therefore bullish activity may be excessive.
Similarly, a very low call/put ratio is bullish because it shows that investors are trading heavily in puts and that bearish sentiment may be exaggerated. The daily call/put ratio itself is quite unstable, and it is therefore difficult to attach much importance to the ups and downs. In Figure 9, the average call/put ratio can be seen to be around 1.6 calls for each individual put, with 1.7 – 1.9 representing an overbought level and around 1.3 representing an oversold level.
Note that the 10-day average call/put line follows the price action quite closely and that the tops generally coincide quite closely. Arms is the creator of the "Arms Index," otherwise known as "TRIN." This is therefore the most complete explanation of TRIN and using up/down stock market volume to assess market direction. Babcock, Bruce, Jr., Dow Jones-Irwin Guide to Trading Systems, Dow Jones-Irwin, Homewood, Illinois, 1989.
This is also one of the few books available that presents technical analysis in a more advanced way and presents a refinement of some of the fundamental technical indicators. Cohen, A.W., How to Use the Three-Point Reversal Method of Point & Figure Stock Market Trading, Chartcraft, Inc., Larchment, New York, 1985. Probably best used as a reference to obtain detailed information on the value of the varia - indicators, how they are calculated and how they should be interpreted.
