Chart Chat - Indicators

The best indicator of where price is likely to go (near-term) is the price chart itself. However, there are hundreds of indicators created to help solve this problem. Yet, all we have to work with on charts is:
All indicators are derived from these three factors and their many combinations. The goal is to see into the future, to determine where the price will go! Forget it… We can never know with certainty where the price will go. We can improve the odds, increase the likelihood of our “guess-success,” and that can provide the “edge” needed for success in the market. Proper use of indicators can be very rewarding.
The price chart can send subtle messages and indicators can help understand those messages. But, of paramount importance:
Most price charts tell us nothing most of the time!
That said, when messages are sent, they are worth solid gold. The most rewarding messages are called “divergences,” where the indicator can contradict the price pattern. Good indicators have that ability.
Look at the following pick made on 3/26/04 (two weeks ago), MAGS. The dark vertical line shows the date of the pick. Does that make your blood run cold?

Fig. 1 Magal Security Systems (MAGS), a momentous pick.
How could we have known such an increase was imminent? This is where some homework (review, study, post-mortem) can help. Look at the watch-list performance review for this pick-set:

Fig. 2 Performance Watch-list including MAGS.
Let’s compare the best and the worst, MAGS and TRZ. A chart for TRZ is shown next, how it looked this weekend. The dramatic difference between the two is more because of the increase in MAGS, that is, a minus 7% drop in TRZ is not that profound. Yet the difference is notable.

Fig. 3 Trizec Properties Inc. (TRZ), a pick disaster.
Let’s back up both charts to see what they looked like on 3/26/04 and look for messages (differences). We’ve included the third window showing indicators we use to help find direction going forward:
- Top Window:
  1. Price
  2. 50 day moving average
  3. Bollinger Bands (20 period, 2 Standard deviation)
  4. 20 day moving average (for Bollinger Band center reference)
  5. MS (money stream, Worden Bros. proprietary price/volume/time indicator)
- Middle Window:
  1. Volume (with 50 day moving average)
  2. Stochastics (30,15,10)
  3. On Balance Volume (OBV)
  4. Rate of Change (15 bar solid, 5 bar dashed)
- Bottom Window:
  1. Time Segmented Volume (TSV) – A second Worden price/volume/time indicator, 18-bar solid, 8-bar dashed.
  2. Balance of Power (BOP) – a third Worden price/volume/time indicator, green = accumulation, red = distribution
  3. MACD (12,29,9)
  4. Wilder’s RSI (14,4)
These indicators are only a few of the multitude available and the parameters represent one man’s opinion at one point in time. You must find what works for you through repeated trials over time. What is important here is the methodology, a way to learn through review. Now, look at MAGS on 3/26.

Fig. 4 MAGS, a closer look.
We see volume-driven moves out of a long base. BOP suggests some accumulation prior to the move. TSV is a strong short-term indicator when it rises above the zero line, in this case suggesting strength. The gap that occurred on the largest volume day might weaken the move since gaps are usually filled, but in this case a break-away gap, not requiring the fill. Now, compare that scenario to TRZ:

Fig. 5 TRZ, a closer look.
The Bollinger Band pattern is unclear, that is, it moves to the top in early February, then falls to the average until it drops to the bottom in mid-March, then back to the top. That is an uncertain trumpet. It flirts with the 50-day MA in mid-March. Volume in the second window is fairly consistent. OBV follows the price up at the end. Point: when indicators follow the price lock-step, that tells us only that nothing is wrong. The same can be said about TSV in the bottom window. It is not a suggestion of added strength, beyond what the price is telling us. The Rate of Change (ROC) is a momentum indicator telling us how fast the price is changing. Notice, there is a subtle decrease in the ROC from the price peak in February to that in March, with the price itself has increased. That represents a divergence. This surge in price momentum is weakening. One added negative is the absence of any accumulation in the BOP. Institutions are avoiding this company.
So, this comparison highlights some important technical issues we can follow as we decide where to put our money. That said, we must never lose sight of the craft we engage in as we learn to be better traders. It is a craft. As we study indicators, for hints and suggestions, they give us just that, hints and suggestions. An indicator never made the price do anything! It is the other way around.
Look at the following pick made on 4/02/04, just last week.

Fig. 6 OMCL, last week’s pick.
This pick was made on Friday, the following Tuesday it fell nearly 30% in one day. Here’s a closer look at the drop:

Fig. 7 OMCL, a closer look.
Now I challenge you to forecast that drop from any indicator action. To further confound the situation, following are news items from Briefing.Com on that day:

Fig. 7 OMCL news reports on the day of the drop.
Four news items on that day, one negative and three positive. Go figure! Rather, go place protective stops with every order you place. We have absolutely no control over where stock prices will go. We do have control over how much we will lose if it goes against us. And that, friends, is as close to the holy grail of investing as we will ever come. Have a good Easter.
Be Diligent
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