Technical Analysis and Charting

Top 167. Apr 23, 1999 2:27 PM

» TONYBRIG - My stocks only go up :)

Dan:

But seriously my kind of stocks move too fast
like AOL & EGRP. Could drop-down then gap-up
b4 I can get back in it.
Rather just ride em out if they correct.
For now!
But thanks!

Trying to find a link that rates the Big Houses
like Merril and their ability to move a stock/
market. Have anything!

VBOLHH

-- posted by TONYBRIG

Top 168. May 12, 1999 4:59 AM

» TONYBRIG - Van Nice

Dan G

Where ya been?

Do you know this Charing Service?

vbolhh

-- posted by TONYBRIG

Top 169. May 14, 1999 7:17 PM

» TONYBRIG - Somethin I found

Getting Technical
May 3, 1999 - 5:00 PM
By Gregory Hight

- Chat with Greg on his message board

Do you believe a security’s price and trading volume reflect all knowledge about its present and future value?

If so, you probably favor technical investing, one of two styles into which securities analysis is traditionally grouped - the other being fundamental. Technical analysis examines capital market activity, primarily securities prices and transaction volume. Fundamental analysis, on the other hand, looks at market-exogenous variables, including political, economic, industry and corporate data.

Most technical analysts direct their decisions using models, which are sets of rules used to inject discipline into the buying and selling of securities. Many models use technical indicators, such as the kinds which Norman Fosback discussed in his classic work Stock Market Logic: A Sophisticated Approach to Profits on Wall Street. Such market indicators include the advance/decline line, put/call ratio and the short-interest ratio.

Technical Indicators Don’t Work

The trouble with most market indicators is they don’t work. Their reliability is so low, only a fool would use them without plenty of corroborating data.

There are a few exceptions. The slope of the yield curve offers reliable information about the likelihood of a recession and a bear market; the put/call ratio and advance/decline line often predict future market direction; and a few others can be counted on from time to time.

But for the most part, market indicators don’t work. Is it because they are conceptually flawed? Are they simply hopes built on what we think should be true about the markets? The answer is no on both counts. Market indicators fail because of their insensitivity. If the advance/decline line is only slightly positive or negative, it lacks a relationship to future market trend. A one or two percentage point change in the put/call ratio fails to predict the market’s direction.

Short Interest Ratio

Selling a stock short is a bet that its price will decline. That sentiment can be quantified in what’s called a "short ratio." Short ratios are technical market indicators which describe the magnitude of bearish sentiment for a particular stock. The general idea is that if the short ratio is high, bearish sentiment is strong. However, conventional wisdom also holds that short sellers are usually wrong about the future direction of a stock’s price. Therefore, significant short volume is a bullish indicator; it’s a contra-indicator.

Short interest ratio is probably the most commonly used measure of bearish sentiment. It is calculated by dividing the number of shares that have been sold short by the average daily trading volume for 30 trading days. A wide ratio indicates a strong bearish sentiment.

Short ratios, like most market indicators, don’t work because they are insensitive. However, by looking at the extremes, some interesting information can be discovered.

The Test

Users of technical indicators know thresholds must be met in order for many indicators to work. Norman Fosback asserted that the short interest ratio must exceed 1.75 in order to reliably predict price increases. The problem with fixed thresholds is that markets are changing all the time. Thresholds which worked in the past may not work now or in the future. The solution is to regularly test and establish new thresholds. One approach looks only at the extremes.

We tested 129 stocks from high-volume industries to evaluate the relationship between short-interest ratios and subsequent rates of return. The stocks’ one or two-month rates of return were compared with their short-interest ratios at the start of the period. A simple test evaluated whether higher returns corresponded with higher short ratios as predicted by this supposed contra-indicator. The result was ratios which lacked any relationship with returns.

A following comparison was made between ratios and returns within industries. The indicator, although predictive in some cases, yielded unreliable results even when considering only the extreme ratios.

After evaluating a few other relationships, finally we hit on a surprising and significant result. All but the top 5% of short-interest ratios were eliminated from consideration. These ratios were six times larger than the average. The result: Among the outlying group, higher short-interest ratios corresponded with lower rates of return and lower ratios corresponded with higher rates of return. Among the sampled stocks with very high short-interest ratios, the short interest ratio was not a contra-indicator.

This illustration is not meant to suggest that the short-interest ratio should be used as an exclusive predictor of future performance. However, it does suggest that value can be added to investment decisions by using technical indicator outliers to aid investment decisions. At an intuitive level it suggests that technical data are filled with noise. However, outliers contain less noise and, when combined with corroborating information, can add value to investment decisions.

Enjoy!

vbolhh

-- posted by TONYBRIG

Top 170. May 23, 1999 2:27 PM

» KirkL - Dan or anyone

Dan or anyone

Is a "Health restoring correction" just another form of TA?

IF fundamentals don't change, why would the market tank?

1973/1974 we had the end of Vietnam (lost a war!), fear of commies running amok, a president removed, an energy crisis, etc... good, fundamental reasons for a long, painful bear.

Today, we just have Tony and friends paying alot for some stocks where they think p/e's don't matter. They are not the majority and I don't think they will bring down the market.

-- posted by KirkL

Top 171. May 23, 1999 2:36 PM

» TONYBRIG - Please dont mention my name on a Sunday

Be respectful Kirk!
But seriously how ya know I didnt sell off?
Been speaking to my broker?
Looking in on my Portfolio is a NO NO!
The lesson here is things change dont say.........
Today without verification!

vbolhh

-- posted by TONYBRIG

Top 172. May 24, 1999 2:09 AM

» DanG_6 - "Healthy Correction"

Kirk,
Don't know where the term "healthy" correction came from, but corrections (healthy or not) are certainly a part of normal market action. I guess a "healthy" correction is one that doesn't turn into a bear market!
I do think that the market could tank as a result of the high valuations we are seeing. The outlandish p/e of the market can no longer be justified by ever decreasing interest rates. They have been on the rise since last August. The market is in the most vulnerable position it has been for decades. I must confess that I see no indication of distribution in the charts, but that's not all I watch. High valuation brought the market to its knees in 1962 and then the p/e was far less than it is today. All it took was Kennedy's blast at then head of US Steel, Roger Blough, for raising steel prices to send the market reeling for 5-6 months. What will trigger it this time? If only I knew. But my powder is becoming drier and drier with each passing day.
- Dan

-- posted by DanG_6

Top 173. May 24, 1999 3:05 AM

» Jaybird248 - "Doin' the Chicken Little"

Dan, valuations have been higher than traditional for years. Those who bailed when the S+P exceeded 17/1 have missed the last 3000 pts of the bull market.

What will kill this market is a fuel shutoff...incoming cash going elsewhere:

Going.to bonds n' banks due to higher rates, to other nations with resurgent economies, to the mattress due to simple fear, based on news events, including market missteps magnified by the media into market quakes. That's why I get so mad whenever the blow-dried blowhards of CNBC start doin' that new dance, "the Chicken Little", on the air.

The resiliency we've seen is due, in part, to fund flows being automatic. Try changing your 401-K choices in some companies. Once every 90 days, is it? And that's assuming the employee even knows where it's going. As we hear weekly on Confessions with Bob, many don't. "I think I have my money in an IRA."

But waken the sleeping giant and it's Katy, bar the vault.

And swallow the combination.

-- posted by Jaybird248

http://finance.yahoo.com/q?s=hwp%2C+ibm+...

Top 174. May 24, 1999 7:55 AM

» KirkL - Third test of the low for Dell?

Third test of the low for Dell?

Interesting chart for Dell
http://finance.yahoo.com/q?s=DELL&d=3m

Could be in a new trading range or is it about to tank going to a p/e closer to HWP(31) and IBM(33) rather than its present p/e of 65?

Time will tell. Too risky for me with high rates to chase these, but many have made good money buying on the dips.

Chartists, what does the charts recommend?

-- posted by KirkL

Top 175. May 24, 1999 9:28 AM

» DanG_6 - P/E vs Interest Rates

Jay, I posted a reply to your message, but it somehow got swallowed up in cyberspace. The point was, though, that P/Es have been higher than they have ever been traditionally, as you suggested, but they have grown in a generally favorable interest rate invironment. The rates have been rising since October, however, and some day folks will wake up and question the logic of investing in stocks carrying a earnings yield of 1/27 or lower (3.7% TOTAL return) vs a higher yield in a riskless asset such as t-bills. When that happens, and the last bunch of "gun-slingers" can't find another "greater fool" to sell to, the game will come to a screaching halt. Unless, of course, we have reached that "new era" I have heard about where value has no meaning.
- Dan

-- posted by DanG_6