Market Indicators

Indicatorsare calculations based on the price

andthevolumeofasecuritythat measuresuch
things as money flow, trends, volatility and
momentum.

Indicatorsareusedasa secondary measure to

the actual price movements and add additional
informationtotheanalysisofsecurities.

Market Indicators
Indicators are used in two main ways:

toconfirmpricemovement,and

toformbuyandsellsignals.

Market Indicators
Theseindicatorshelpidentify:

momentum,
trends,
volatility,and
various other aspects in a security to aid in
thetechnicalanalysisoftrends.

Indicatorsarebestusedinconjunctionwithprice
movement,chartpatternsandotherindicators.

Market Indicators: Breadth Indicators

The Advance-Decline Line: The advancedecline line is also referred to as the breadth of
themarket.
Its measurement involves two steps:
Step1: Calculatethenumberofnetadvances/declines
onadailybasis.
Step2: Obtainthebreadthofthemarketofthemarket.
Indication: If the market average is moving upwards,
whereasthebreadthofmarketismovingdownwards,it
indicatesthatthemarketislikelytoturnbearish.

Market Indicators: Breadth Indicators

The Advance-Decline Line
Day

Advances Declines Net Advances or

Declines

Breadth of
Market

Tuesday

630

527

103(630-527)

103

Wednesday

690

475

215(690-475)

318(103+215)

Thursday

746

424

322(746-424)

640(318+322)

Friday

492

630

-138(492-630)

502(640-138)

Monday

366

701

-335(366-701)

167(502-335)

Tuesday

404

698

-294(404-698)

-127(167-294)

Market Indicators: Sentiment Indicator

Short-Interest Ratio: The short interest in a

securityissimplythenumberofsharesthathave
beensoldshortbutnotyetbroughtback.

Investors sell short when they expect the prices

to fall. So when the short interest ratio is high it
meansthatmostinvestorsexpectthepricetofall.

Totalnumberofsharessoldshort
ShortInterestRatio=---------------------------------------------Averagedailytradingvolume

Market Indicators: Sentiment Indicator

Mutual Fund Liquidity: According to the theory

ofcontraryopinion,itmakessensetogoagainst
thecrowdbecausethecrowdisgenerallywrong.

Based on this theory, mutual fund liquidity has

beendeveloped.

IfMFLislow,itmeansthatthemutualfundsare
bullish. So, contrarians argue that the market is
atthepeak&henceislikelytodecline.Thus,low
MFLisconsideredasabearishindicator&viceversa.

Market Indicators: Sentiment Indicator

Put / Call Ratio: Speculatorsbuycallswhenthey

are bullish and buy puts when they are bearish.
Since speculators are often wrong, some
technicalanalystsconsidertheput/callratioasa
usefulindicator.
Numberofputspurchased
Put/CallRatio=-----------------------------------------Numberofcallspurchased

Market Indicators: Sentiment Indicator

Example:Aratioof0.70meansthatonly7puts
arepurchasedforvery10callspurchased.

A rise in the put/call ratio indicates that the

speculators are pessimistic. For the contrarians,
this is a buy signal as they believe that the
speculatorsaregenerallywrong.

Converselywhentheput/callratiofalls,itmeans
thatthespeculatorsareoptimistic.Thecontrarian
regardsthisasasellsignal.

Market Indicators: Sentiment Indicator

Trin Statistic: Market volume may be used to

judge the strength of a market rise or fall.
Technical analysts regard advances as more
bullish if they are accompanied with increased
trading volume. Likewise, they consider declines
as more bearish when accompanied with
increasedtradingvolume.
Numberadvancing/numberdeclining
Trin=-----------------------------------------------------Volumeadvancing/volumedeclining

Market Indicators: Sentiment Indicator

Generally, a trin ratio of more than 1 is deemed

bearish as it means that the declining stocks
have higher average volume compared to
advancing stocks, suggesting a net selling
pressure.

Moving Average Analysis

There are a number of different types of

movingaveragesthatvaryinthewaytheyare
calculated, but how each average is
interpretedremainsthesame.

The calculations only differ in regards to the

weighting that they place on the price data,
shifting from equal weighting of each price
point to more weight being placed on recent
data.

Moving Average Analysis

The three most common types of
moving averages are:
1. SimpleMovingAverage
2. LinearMovingAverage
3. ExponentialMovingAverage

Simple Moving Average

This is the most common method used to

calculatethemovingaverageofprices.

It simply takes the sum of all of the past

closingpricesoverthetimeperiodanddivides
theresultbythenumberofpricesusedinthe
calculation.

Forexample,ina10-daymovingaverage,the
last 10 closing prices are added together and
thendividedby10.

Simple Moving Average

A trader is able to make the average less

responsive to changing prices by increasing
thenumberofperiodsusedinthecalculation.

Increasing the number of time periods in the

calculation is one of the best ways to gauge
the strength of the long-term trend and the
likelihoodthatitwillreverse.

Simple Moving Average

Linear Moving Average

This moving average indicator is the least

common out of the three and is used to
addresstheproblemoftheequalweighting.

The linear weighted moving average is

calculatedbytakingthesumofalltheclosing
prices over a certain time period and
multiplying them by the position of the data
point and then dividing by the sum of the
numberofperiods.

Linear Moving Average

Example, in a five-day linear weighted

average, today's closing price is multiplied by
five, yesterday's by four and so on until the
firstdayintheperiodrangeisreached.These
numbersarethenaddedtogetheranddivided
bythesumofthemultipliers.

Exponential Moving Average

This moving average calculation uses a

smoothing factor to place a higher weight on
recent data points and is regarded as much
more efficient than the linear weighted
average.

Having an understanding of the calculation is

not generally required for most traders
because most charting packages do the
calculationforyou.

Exponential Moving Average

The exponential moving average is more

responsive to new information relative to the
simplemovingaverage.

This responsiveness is one of the key factors

of why this is the moving average of choice
amongmanytechnicaltraders.

A15-period EMArises and falls faster than a

15-period SMA. This slight difference doesnt
seemlikemuch,butitisanimportantfactorto
beawareofsinceitcanaffectreturns.

Exponential Moving Average

Moving Average
What do the different days mean?
20 days - choppyline.Itisn'tthemostaccurate,but
isprobablythemostusefulforshorttermtraders.
30 day - similar to 20 day but provides a bit more
certaintyforthetrend.
50 day - moving averages provide a much less
volatile, smooth line. This can be used to detect
somewhatlongertermtrends.

Moving Average

100 day - similar to the 50 day, it is less

volatile,andoneofthemostwidelyusedfor
longtermtrends.

200 day-evenlessvolatile,moreofarolling
chartorsmoothline.Itdoesn'treacttoquick
movements in the stock price therefore it is
rarelyused.

Strategies for Moving Averages

Crossovers
Severaldifferenttypesofcrossover's,butalloftheminvolve
twoormoremovingaverages.
In a double crossover you are looking for a situation
where the shortest MA crosses through the longer one.
This is almost always considered to be a buying signal
since the longer average is somewhat of a support level
forthestockprice.
For extra insurance you can use a triple crossover,
wherebytheshortestmovingaveragemustpassthrough
the two higher ones. This is considered to be an even
strongerbuyingindicator.

Strategies for Moving Averages

Filters
Usedtoincreaseconfidenceaboutanindicator
Nosetrulesorthingstolookoutforwhenfiltering,
justwhatevermakesyouconfidentenoughtoinvest
yourmoney.Example:onemightwanttowaituntila
securitycrossesthroughitsmovingaverageandisat
least10%abovetheaveragetomakesurethatitisa
truecrossover.
Remember,settingthepercentiletoohighcould
resultin"missingtheboat"andbuyingthestock
atitspeak.

Strategies for Moving Averages

Filters
Anotherfilteristowaitadayortwoafter
thesecuritycrossesover,thiscanbeused
tomakesurethattheriseinthesecurity
isn'taflukeorunsustained.

Again,thedownsideisifyouwaittoo
longthenyoucouldendupmissing
somebigprofits.

MACD

A variation of the moving average is the

moving average convergence divergence or
MACD.

It involves comparing a short term moving

average (a 50 day moving average) with a
longtermmovingaverage(a200daymoving
average).

MACD

If the short term moving average is

consistentlyhigherthanthelong term moving
average,itisabullishsignal.

If the short term moving average is

consistently lower than the term moving
average,itisabearishsignal.

Relative Strength Analysis

Therelativestrengthanalysisisbasedonthe
assumptionthatpricesofsomesecuritiesrise
rapidly during the bull phase but fall slowly
duringthebearphaseinrelationtothemarket
asawhole.

In other words, some securities possess

greaterrelativestrengthandhenceoutperform
themarket.

Relative Strength Analysis

RSI also helps to signal overbought and

oversoldconditionsinasecurity.

The indicator is plotted in a range between

zero and 100. A reading above 70 is used to
suggest that a security is overbought, while a
reading below 30 is used to suggest that it is
oversold.

Thisindicatorhelpstraderstoidentifywhether
a securitys price has been unreasonably
pushed to current levels and whether a
reversalmaybeontheway.

Relative Strength Analysis

Relative Strength Analysis

The standard calculation for RSI uses 14

trading days as the basis, which can be
adjusted to meet the needs of the user. If the
trading period is adjusted to use fewer days,
the RSI will be more volatile and will be used
forshortertermtrades.