The Tech Doctor
Explanation of terms and ideas
I follow the stock market because I love it. It’s a challenge, a hobby, a
passion. And, once in awhile, I can make some money. I’m happy to share
my observations and welcome a dialogue.
It’s important for anyone who reads my observations to understand what I
do, and what I think about technical analysis. The price of stocks, indices,
commodities, etc. can be charted. Usually this is done with a bar graph
and the price can be applied in any time frame. For my “reports” I use the
Over the years, people much smarter than me have developed
mathematical models to analyze the movement of these prices. Some ideas
are very simple, like trend lines above and below the highest and lowest
prices. Others are very complex like the rate of change of the price, the
average of the price over time, momentum, etc. You can read all about the
various methods in countless books. I would recommend a simple
Technical Analysis text book, such as one by John Murphy.
Every night I look at around 30 different models that are in fairly common
use. Most I have not changed in anyway from their author’s intended
purpose. A few I have “tweaked” after years of observation and note
taking. I report what I see and then try to sum up what I think it all means.
But here is the most important part. I’m not sure I “believe” any of it.
That’s right. I’m the most obsessed technical analyst in the world, but I
think it’s all pretty silly. That isn’t to say it isn’t helpful. In fact, it’s critical
to the success of trading. What I’m trying to say is that I understand that it
is what it is – a valiant, but ultimately foolish – attempt to make order out
of chaos. And most important, it ONLY analyzes what has happened.
There is NOTHING AT ALL that tells us the future.
After years of looking at this data, then seeing what happens the next day,
I have a pretty good handle on which of these indicators are more valid
than others. I, like many technicians, also look at all this data because we
believe that many others are ALSO looking at this data, so it’s important
to know what everyone else may be seeing. A simple example is the 200
day moving average. MANY people look at this, so it’s important to know
where we are in relation to it. You will understand over time.
Finally, it’s very important for you to understand which of these indicators
are important in the short, intermediate or long term, as this creates much
confusion. For instance, some of our important TREND following
indicators may be very bearish, but some of our short term OSCILLATOR
indicators may be pointing to an oversold condition, warning of a possible
upward short term move WITHIN AN ONGOING intermediate downtrend
This is my own. It is also known as the UVDV, as the packet in which the
data arrives contains up volume, down volume, among other neat stuff.
The KING is a cousin of a better known indicator which is known as the
SUMMATION index. Essentially, I count ongoing breadth – up versus down
– movement among the stocks in the NYSE. I have a running total going
back to the 1970s. This is “proprietary”. But it’s beautiful. What it’s telling
us is that stocks are either being bought or sold. Period. Or, that stock are
being “accumulated or distributed”. Big money does not move quickly in
and out of the market, so this gives us a pretty good idea of how things
are going, usually over 6 -12 week periods. For the most part we should
be trading with the king, not against it, but there are exceptions. This will
usually be reported as either being positive or negative. I also have a filter
on this for the rare whipsaw, and will comment on that when it’s
This is just the McClellan Oscillator. I report the numbers and will
comment when it reaches extremes.
The AD Indicator
I have several of these, but usually comment on one in particular. It’s an
old time indicator, with a short, intermediate and long term component.
Mostly I report on the short term component and will DEFINITELY let you
know when this is at an extreme as it almost ALWAYS warns of a trend
change. You might find this under HAURLAN in some old TA books. The
“other” indicator is a summation, or running total of advancing/declining
issues. You may see this referred to as the BOLTON-TREMBLAY
indicator in some old texts.
I report the 1, 5 and 10 day simple closing trins, or ARMS index. My
experience with this is that it is modestly helpful most of the time, but
VERY helpful at extremes, and I will comment when necessary.
I report on the exponential 10 and 55 day averages, as discussed in PIT
BULL, by Marty Schwartz. This is his RED LIGHT GREEN LIGHT. READ
HIS BOOK. I will also comment on the SIMPLE 20 day Moving Average, as
this is WIDELY WATCHED and is also the CENTER LINE of the standard
Bollinger Band. And the SMA 200 when appropriate.
I look at the ALPHA BETA TREND CHANNEL, which is an old commodity
indicator. For the most part, prices remain within the channel, and will
often bounce from one end to the other, although not “on cue”. When the
price gets too far out of the channel, this is important, as prices “like” to
go back into the channel. Also, this system has a “filter” and often is
helpful for keeping us on the right side of the trend.
I also look at the standard, daily BOLLINGER BAND, and will interpret
what I believe is happening here, too. This is VERY WIDELY followed, so
it’s important to know what these boundaries are. These may look alike
but are VERY different.
Finally, I look at my own “percent moving average” band, similar to what
is in PIT BULL, although I rarely report this.
These are shorter term “momentum” indicators. I use a 5 day rate of
change indicator, referred to as the ROC. I look at the standard 14 day
RELATIVE STRENGTH INDEX, and refer to it as the RSI. This is perhaps
one of the coolest of all indicators and VERY useful at extremes and at
points of divergence. I will comment on this. I use the Williams’s %R, using
fairly standard settings. I use the Williams ULTIMATE oscillator, using his
original “default” settings. This is a GREAT indicator, and will comment on
where it’s at. I look at a variation of the SLOW STOCHASTIC with some
“proprietary” settings. This is also helpful mostly at inflection or turning
points, but can also be useful once a good trend is underway to keep you
from changing or bailing too quickly. Of course, I look at the MACD, or
moving average convergence divergence indicator. I find this most useful
in a big picture way and will report if we have “crossed over” but also if
we’ve done this above or below the zero line. A MACD that is WAY above
zero and is crossing negative “could” be a sell, but sometimes it’s better
to wait for the signal to fall below zero to “confirm” the sell. I will
comment when appropriate.
I use Joe Granville’s ON BALANCE VOLUME, along with a filter, again to
watch for “whipsaws”. This is a GREAT indicator, especially when used as
a “divergence” tool. I will often comment on this. I look at the ARMS EASE
OF MOVEMENT indicator, and will sometimes refer to it as the EMV.
I use a variety of old, weird indicators mostly for me to synthesize and I
may comment on them from time to time. I use a trend indicator known as
the WAVE, a 5 day PRICE summation index with a SMA 20 filter, a
variation of the ADX, mostly commenting on the POSITIVE DIRECTION
and MINUS DIRECTION indices and their relation to each other (i.e. how
close together or far apart they are). I use a variation of the DEMAND
INDEX which shows Buying and Selling Pressure, again usually
commenting on whether we’re close together or far apart and whether
we’re moving towards or away. I use a real old indicator known as the
Norton High Low and another oldie called the NOTIS %V. If you really
want to learn about them, let me know and I can dig up some very dusty,
old references. Finally, (and I think I’ve gotten them all in), I use a 5
WEEK RATE OF CHANGE along with a 21 WEEK SMA, to keep my head
in the bigger picture. The R5W is what I call the 5 week ROC. Usually, not
always, if we’re above 100 the market is heading higher or if we’re under
100 we’re heading lower. This is a SLOW TREND indicator and NOT
useful for day to day trading. AND, I use an old VOLATILITY index I refer
to as VOL. This is NOT the popular VIX, but represents price change over
time. Once again it’s VERY useful at extremes, but also helps us determine
if we’re in a choppy (scalping) market or a smoother, trending market.
This is where we make money. I calculate PIVOTS using a very old
technique picked up out of an old commodity floor trader’s book. These
numbers are UNCANNY. I report 5 numbers and refer to them as PIVOT,
next high, high high, and next low and low low. Usually (not always) Next
High would be considered a SELL PIVOT and NEXT LOW would be
considered a BUY PIVOT. The outer extremes are there and will be
explained as needed on a daily basis. You should learn to MARK THESE
NUMBERS IN FRONT OF YOU every day. BECAUSE THEY WORK.
Mathematically they make a lot of sense. Follow them for a few days and
you will be amazed. There is a lot of “talk” out there about “pivots”, and
there must be many types of pivots. Another system for finding a short
term pivot point is to keep track of where the market was during periods
of excessive tick. When important, I will comment on that, but be aware
that is distinct from my reported PIVOTS. I usually LIST the pivots for the
active SP futures contract, but will note the OEX and QQQ. I personally
use them for trading the active Bond Futures, too.
The Esoteric and the Exotic
Two more indicators I refer to are the FIBONACCI FAN LINES and the
QUAD. I think, of ALL the wacky stuff out there, none is wackier then
ELLIOT wave stuff, although there are many who can use it and “see it”
and make money. Not me. BUT, I find the FIBONANCCI FAN LINES
extremely helpful. I look at short term and intermediate fans every day,
but will look at long term fans when the occasion is right, like when we
get HUGE MOVES and we have to look back years to get a feel where we
are. This is Voodoo stuff, to be sure, but in the short term, the Fans will
give us very helpful targets. Sometimes they are more helpful than at
other times, and I will usually comment on this. The QUAD or QUADRANT
level is a simple way of breaking up the price movement into zones. For
those of you familiar with Mark Cook, it is somewhat similar to his “BOX”
work. I look at short, intermediate and long term QUADS. We are always
in one zone or another, and it helps to know the upper and lower
boundaries. Finally, I may comment on some stuff like percent
retracement, again, mostly because others do and it’s helpful. If we’ve
rallied and failed, it can be helpful to know that we are back to the 66% or
50% retracement, for example. I will also comment on the daily PUT CALL
RATIOS as reported directly by the CBOT. I look at both the equity and
INDEX ratios. I also will comment on the closing PREMIUM when
important. This represents the variation of the SP futures price to the
cash closing price.
This has been a rough overview of what I’m looking at every night. Most
of it is calculated using a nearly 20 year old DOS program with data from
CSI in Florida (very, very accurate data). Some of it is calculated by hand.
As of MARCH 2003, thanks to the experts at STRATAGEM, I’ve been able
to reproduce these charts for you every night and you can find them under
CHARTS 1 and CHARTS 2. If you ever see something that is unclear or
you don’t understand, please feel free to contact me.
If you have questions, please email me at firstname.lastname@example.org .
Just remember NO ONE can predict the future. I’ve looked at these charts
for years and have a pretty good feel for where we are and where could
be heading. But to make money YOU have to have a trading plan, strict
money management skills, discipline and stop loss rules.
For instance. I may report that the KING IS NEGATIVE. This means that
we are MORE LIKELY TO GO LOWER THAN HIGHER over the next few
weeks or more. Yet several days later, I may report that the ULTIMATE is
very low, like 35, that the William’s %R is at or near zero, and the RSI is
touching its lower “30” line. I might add that we are BELOW the lower
alpha beta line, but the OBV “did not confirm” the recent move down”. In
this case, with a negative KING you would either cover intermediate
shorts or move your stop WAY down, or you would use tomorrow’s pivots
to look for a place to get long for a “snap back” rally, or just stand aside
until the snap back plays itself out and look for a place to get short again.
Another helpful hint. Sometimes it seems as if half the indicators are
pointing up and half of them down. In those situations it would be best
NOT TO TRADE, or just use whatever day scalping method you use.
Finally, where we really shine is when they ALL LINE UP and move to
time-tested extremes. This is when we really get excited. At these times,
we can, with the usual appropriate fear and trepidation, load up for the big
move. USUALLY in the OPPOSITE direction. A good example would be a
KING that’s been negative for 10 weeks, an AD indicator at MINUS 1200,
a high 1, 5 and 10 day trin, a market that’s been struggling to get back
into the channels, or HAS gotten in and has been holding, an ULTIMATE
oscillator coming off VERY LOW levels and a %R that is struggling to
come off of near zero levels. At these times I would usually be giving you
QUAD and FIB FAN support levels and seeing where they compare to the
daily PIVOT levels. How you use that is how you trade. You can either bid
low for OEX or DOW calls, you can begin accumulating long SPY or QQQ
or you can take a flier on long SP futures. Whatever.
Anyway, I hope this is helpful. Just follow it for awhile and you’ll get the
feel. Beauty is in the eye of the beholder. Each of us “sees” what we see
in various indicators. If you learn to just accept them for what they are
(NOT THE HOLY GRAIL), and take them with the grain of salt they
deserve, over time you will make money. PLEASE send along comments
or new ideas. As Ross Perot says, I’m all ears. Just remember: my nightly
comments are based ENTIRELY ON DAILY CLOSING CHARTS, except for
the occasional reference to a weekly or a monthly chart, when
appropriate. <<JIM RAKER>> the TECH DOCTOR 2/1/03 UPDATE: APRIL 7, 2003