Stocks & Commodities V.

21:10 (68-72): Bull And Bear Balance Indicator by Vadim Gimelfarb

Bull And Bear

Balance Indicator
This new indicator analyzes the balance between bullish and THE ELDER-RAY INDICATOR
bearish sentiment. The most popular method of estimating this power struggle
between the bulls and the bears is the Elder-ray indicator,
by Vadim Gimelfarb which was developed and described by technician Alexander
Elder. Elder based the indicator on the following premises:

E
very day at the stock exchanges, a battle is waged
between the buyers (“bulls”), who are trying to The moving average is the agreed-upon price between
push prices up, and the sellers (“bears”), who the sellers and buyers during a certain period of time
want to push prices down. The end of the day sees
a higher or lower price compared to the day The maximum price reflects the maximum power of the
before, depending on who wins, while the intermediate results buyers during the day; and
and the maximum and minimum prices show the course of the
battle during the day. Since the shifting of power between the The minimum price reflects the maximum power of
bulls and the bears is one of the first signs of a probable turn of sellers during the day.
trend, the task of estimating this balance has often drawn the
attention of stock market analysts, who offer varying solutions.

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Stocks & Commodities V. 21:10 (68-72): Bull And Bear Balance Indicator by Vadim Gimelfarb

On the basis of these premises, Elder

defines the bull power as the difference
between the maximum price and the 13-day
exponential moving average (H-EMA). The
bear power is the difference between the
minimum price and the 13-day exponential
moving average (L-EMA).
Such an approach, although valid, has one
serious disadvantage. By taking into ac-
count only the maximum, minimum, and
average prices within a definite period, the
range of information that can be obtained
from the price graph data decreases. There-
fore, discrepancies between the price graph
data and the indicator values sometimes oc-
cur. This mostly happens on critical days, so
the analysis of these days is the main task, and
that is the purpose of the bull and bear power
estimation.
Here’s an example: As you can see in
Figure 1, Elder-ray values on September 20
and November 12, 2002, show that sales
resulted in the increase of bear power, while the bull power In a similar way, the bear power is defined as the average of:
decreased. However, a visual analysis of the graph shows that
in both cases the bulls are more entitled to proclaim victory, The ability of bears to reduce the price from the
while the bears controlled the situation on the previous day. opening price to the minimum price (opening price –
The contrary situation may be observed on July 10, 2003. minimum price)
The contradiction appears (apart from the maximum and
minimum price values) because visual analysis takes the The ability of bears to reduce the price from the
relative position of the opening, closing, maximum, and maximum price to the closing price (maximum price –
minimum prices into account. The Elder-ray indicator disre- closing price); and
gards part of this information.
The ability of bears to reduce the price from the
BALANCE OF MARKET POWER
The balance of market power (BMP) indica-
tor, derived by technician Igor Livshin, of-
fers another approach to estimating the power
balance between the buyers and the sellers,
although it does have a drawback (Figure 2).
Livshin defines the bull power as the aver-
age of three values:

The ability of bulls to raise the price

from the opening price to the maxi-
mum price (maximum price – opening
price)

The ability of bulls to raise the price

from the minimum price to the closing
price (closing price – minimum price);
and

The ability of bulls to raise the price

from the opening price to the closing
price (closing price – opening price, if
the rise occurred; zero if not).

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Stocks & Commodities V. 21:10 (68-72): Bull And Bear Balance Indicator by Vadim Gimelfarb

opening price to the closing price (opening price – If OPt = CPt and MAXt – CPt < CPt – MINt OPt
closing price, if the reduction occurred; zero if not). MINt MAXt CPt (Figure 3d).

After this is done, the actual BMP is determined as the If the closing price is equal to the opening price and they
difference between the bull power and the bear power. are exactly in the middle of the day’s price range, we
The drawback of Livshin’s indicator is that although it assume that the maximum price movement during the day
does consider the opening and closing prices (unlike the (MAXt – MINt) was gained by the side that was more
Elder-ray indicator), it does not take into account the price successful at the closing point in relation to the previous
dynamics of the previous day. As a result, certain discrepan- day’s closing price (CP pr):
cies may be observed such as those noted in Figure 2.
On January 23 and February 6, 2003, there was a signifi- If OPt = CPt and MAXt – CPt = CPt – MINt and CPt <
cant drop in prices, but the BMP indicator nevertheless shows CPpr OPt MAXt MINt CPt (Figure 3e)
that the bulls controlled the situation on those days. It is If OPt = CPt and MAXt – CPt = CPt – MINt and CPt > CPpr
contradictory to refer to the victory of the bulls if they failed OPt MINt MAXt CPt (Figure 3f).
to prevent the landslide of prices at the opening and compen-
sate for this reduction during the day, even if they had some Finally, if the closing price is equal to the opening price
successful results during the trading session. An opposing and they are in the middle of the day’s price range, and the
situation may be observed on December 26, 2002. previous day’s closing price is equal to today’s closing
price, then the path is not logical: The powers of bulls and
BBB INDICATOR ESSENCE bears are equal.
I decided to attempt to derive an indicator for estimating bull and The previous day’s closing price is included into the price
bear power balance that would not have these drawbacks. I also movement trajectory in the following way:
wanted to examine the indicator’s applicability, which would
take into account the intraday price dynamics. The resulting If the direction of the movement from the previous
concept was the bull and bear balance (BBB) indicator. day’s closing price to today’s opening price is the same
The evaluation factor of bull and bear power during the day as that from the opening price to the maximum/mini-
is the maximum price movement achieved by each side mum price, then this movement is considered to be a
between today’s and yesterday’s closing prices. Strictly single graph portion. Otherwise, it is considered to be
speaking, the intraday price change analysis is necessary to two different separate directions’ portions (Figures 3g
estimate this movement. However, as in the case of point & through 3j).
figure charts, some flexibility is possible when working with
only the existing standard information, namely, the opening,
closing, maximum, and minimum prices. In daytrading, I
found that if you present a price movement from the previous Here are the MetaStock formulas for the BBB:
day’s closing price to today’s as a graph with points that
represent the previous day’s closing price, today’s opening Formula for bull power Formula for bear power
price, today’s maximum/minimum price, and today’s closing If(C<O, If(C<O,
price, then this movement follows the shortest path. Excep- If(Ref(C,-1)<O, If(Ref(C,-1)>O,
Max(H-Ref(C,-1),C-L), Max(Ref(C,-1)-O,H-L),
tions caused by the serious trend changes within one day are
Max(H-O,C-L)), H-L),
rare, so rare that they can be omitted without harm. If(C>O, If(C>O,
On the basis of this assumption, depending on the relation- If(Ref(C,-1)>O, If(Ref(C,-1)>O,
ship between today’s opening (OPt) and closing (CPt) prices, H-L, Max(Ref(C,-1)-L,H-C),
the graph that links these two points through the maximum Max(O-Ref(C,-1),H-L)), Max(O-L,H-C)),
(MAXt) and minimum (MINt) prices will appear as follows: If(H-C>C-L, If(H-C>C-L,
If(Ref(C,-1)<O, If(Ref(C,-1)>O,
If OPt > CPt OPt MAXt MINt CPt (Figure 3a) Max(H- Ref(C,-1),C-L), Max(Ref(C,-1)-O,H-L),
If OPt < CPt OPt MINt MAXt CPt (Figure 3b). H-O), H-L),
If(H-C<C-L, If(H-C<C-L,
If the closing price is equal to the opening price (making If(Ref(C,-1)>O, If(Ref(C,-1)>O,
it impossible to draw the shortest path), we assume that the H-L, Max(Ref(C,-1)-L,H-C),
Max(O-Ref(C,-1),H-L)), O-L),
maximum price movement during the day (MAXt – MINt)
If(Ref(C,-1)>O, If(Ref(C,-1)>O,
was gained by the side that was more successful at the Max(H-O,C-L), Max(Ref(C,-1)-O,H-L),
closing point: If(Ref(C,-1)<O, If(Ref(C,-1)<O,
Max(O-Ref(C,-1),H-L), Max(O-L,H-C),
If OPt = CPt and MAXt – CPt > CPt – MINt OPt H-L)))))) H-L))))))
MAXt MINt CPt (Figure 3c)

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Stocks & Commodities V. 21:10 (68-72): Bull And Bear Balance Indicator by Vadim Gimelfarb

After the path of the price movement from the previous As two graphs, corresponding to the bull and bear
day’s closing price to today’s closing price is determined, powers
I compare all portions of the graph. The maximum rising
portion is interpreted as the maximum bull power during
the day, and the maximum falling portion is the maximum
bear power.

APPLYING THE INDICATOR

Here are the different ways of constructing the indicator
graph:

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Stocks & Commodities V. 21:10 (68-72): Bull And Bear Balance Indicator by Vadim Gimelfarb

As a graph representing the difference

between the two powers (power bal-
ance); or

As a histogram of the difference be-

tween the two powers.

Figure 4 displays the BBB indicator as a

histogram. When this indicator turns up-
ward from the negative area, it is consid-
ered a signal to buy. The green arrows
represent the buy signals. When the indica-
tor turns downward from the positive area,
it is considered a signal to sell (red arrows).
You can also look at divergences between
the indicator and price to give you an indi-
cation of future price movement.

OTHER USES
Initially, I intended to use this indicator as
a tool to facilitate short-term decision-mak-
ing based on the instantaneous changes in the bull and bear
power balance in conjunction with other methods of price
dynamics analysis. However, it has proved its value when it
came to determining the placement of protection stops. I
usually determine these by adding the average of 3–5 days’
bull power to the closing price, or subtracting the average
bear power. The average power in some cases may be
multiplied by some coefficient according to the trader’s
acceptable risk level.
Further studies have shown that the indicator can also be
used independently. Since it is an extremely sensitive instru-
ment, it requires smoothing with moving averages for middle-
term trades. For example, if your trades average a three-
week holding period, then it would be helpful to smooth the
bull and bear powers separately with a 20-day moving
average, with an additional smoothing of their difference
(bull and bear balance) with a 30-day moving average. Other
applications are likely, and their development and testing
should be a subject of further study.
Vadim Gimelfarb is a private trader.
SUGGESTED READING
Elder, Alexander [1993]. Trading For A Living, John Wiley &
Sons.
Livshin, Igor [2001]. “Balance Of Market Power,” Technical
Analysis of STOCKS & COMMODITIES, Volume 19: August.
See our Traders’ Tips section this month for strategies implementing
Vadim Gimelfarb’s concepts.

Copyright (c) Technical Analysis Inc.