Key indicators

TOC
1. Momentum oscillator
2. Queuing theory of moving average crossovers
3. MACD
4. Average directional index
5. Wave 4
6. Wave 5
7. Saucer pattern
8. AB=CD pattern
9. Gaps
10. Wedge and triangle pattern
Momentum oscillator
Notes:
1. It measures the rate of price change, e.g. 1-day momentum = today’s close – yesterday’s close.
2. It can be positive or negative
3. Reversal of momentum will not necessarily coincide with a price reversal
Queuing theory of moving average crossovers
Eight rules:

1. If the 200-day average line flattens out or advances following a decline, and the price
of the stock penetrates that average line on the upside, this constitutes a major buying
signal.
2. If the price of the stock falls below the 200-day average line while the average line is
still rising, this also is a buy signal.
3. If the stock price is above the 200-day line and declines toward it, but fails to go
through and instead turns up again, this is a buying signal.
4. If a stock price falls too fast and far below the declining 200-day average line, a short term
rebound toward the line may be expected.
5. If the 200-day average line flattens out or declines following a rise, and the stock
price penetrates that line on the downside, this constitutes a major selling signal.
6. If the price of the stock rises above the 200-day average line while the average line is
still falling, this also is a sell signal.
7. If the stock price is below the 200-day average line and rises toward it, but it fails to
go through and instead turns down again, this is a sell signal.
8. If the stock price rises too fast above the rising 200-day average line, a short-term
reaction may be expected.
MACD
Notes:
1. Similar to RSI, it is a momentum indicator.
2. A typical set-up:
MACD line: the difference between 12-day MA and 26-day MA
Signal line: 9-day MA
3. Buy signal is generated when MACD crosses signal line above.
4. MACD histogram: difference between MACD line and signal line
5. MACD line divergence/MACD histogram diveregence may indicate trend reversal.
Average directional index
Notes:
1. It is also known as directional movement index (DMI)
2. It does not generate buy/sell signal, it serves as trend indicator, telling whether the market is
on a trend or in a range.
3. Rule of thumb:
i. A trend is getting stronger if ADI crosses 20 from below
ii. A trend is weakening if ADI crosses 20 from above

The firmness of the stock trend is expected to weaken when advancing price is accompanied by
diminishing volume, as decreasing volume indicates a rejection of higher prices. And when
declining price is accompanied by a trend in increased volume, it indicates an overhang of selling
pressure.