Market indicators of the technical analysis

Indicators
　　　　
Indicators are calculations based on the price and the volume of a security that
measure such things as money flow, trends, volatility and momentum. Indicators
are used as a secondary measure to the actual price movements and add additional
information to the analysis of securities. Indicators are used in two main ways: to
confirm price movement and the quality of chart patterns, and to form buy and sell
signals.

A technical indicator is a series of data points that are derived by applying a

formula to the price data of a security. Price data includes any combination of the
open, high, low or close over a period of time. Some indicators may use only the
closing prices, while others incorporate volume and open interest into their
formulas. The price data is entered into the formula and a data point is produced.

For example, the average of 3 closing prices is one data point ( (41+43+43) / 3 =
42.33 ). However, one data point does not offer much information and does not an
indicator make. A series of data points over a period of time is required to create
valid reference points to enable analysis. By creating a time series of data points, a
comparison can be made between present and past levels. For analysis purposes,
technical indicators are usually shown in a graphical form above or below a
security's price chart. Once shown in graphical form, an indicator can then be
compared with the corresponding price chart of the security. Sometimes indicators
are plotted on top of the price plot for a more direct comparison.

A technical indicator offers a different perspective from which to analyze the price
action. Some, such as moving averages, are derived from simple formulas and the
mechanics are relatively easy to understand. Others, such as Stochastics, have
complex formulas and require more study to fully understand and appreciate.
Regardless of the complexity of the formula, technical indicators can provide unique
perspective on the strength and direction of the underlying price action.

Uses of indicators
• An indicator can act as an alert to study price action a little more closely. If
momentum is waning, it may be a signal to watch for a break of support. Or, if
there is a large positive divergence building, it may serve as an alert to watch for
a resistance breakout.
• Indicators can be used to confirm other technical analysis tools. If there is a
breakout on the price chart, a corresponding moving average crossover could
serve to confirm the breakout. Or, if a stock breaks support, a corresponding
low in the On-Balance-Volume (OBV) could serve to confirm the weakness.
• Some investors and traders use indicators to predict the direction of future
prices
Classification of market indicators
BREATH OF THE MARKET

The trend of the market can be ascertained by comparing the number of shares
which have advanced and the number of shares that have declined during a period.
Comparison of the advances and decline is a mean of measuring the dispersion or
breath of the general price rise or decline. The difference between the advances and
declines is called the breadth of the market

The breadth is calculated by taking the daily net difference between the number of
shares that have advanced and the number of shares that have declined .each days
difference is added to the next days difference to form a continous cumulative index
can be shown as follows:-

Calculation of breadth

Breadth
Day Advances Declines Daily difference (cumulative
Difference)

Monday 620 350 +270 +270

Tuesday 470 510 -40 +230

wednesday 360 610 -250 -20

Thursday 585 380 +205 +185

friday 705 270 +435 +620

Normally breadth and market index move in unison.In case of divergence ,the
breadth line shows the true direction of the market . for instance during a bull
market if breadth declines to new lows while the market index makes new heighs a
peak is suggested followed by a downturn in stock prices .breadth may also signal
recovery .this happens when the breadth line begins to rise even as the market index
is reaching new lows
SHORT INTEREST

The logic behind this ratio is that speculators and others sell stocks "short" at high
prices in anticipation of buying them back at lower prices. When stock prices rise,
short sellers attempt to maximize profits (or minimize losses) by buying the stock at
the lowest possible price, which in turn contributes to rising stock prices. Thus the
larger the volume of short sales, the larger the volume of "covering 11 that will
occur to maximize profits (or minimize losses)

A speculator often esorts to short selling which is selling a share that is not owned
by the person. This is done when the speculator feels that the price of the stock will
fall in future .and he hopes to purchase the share at a later date (cover his short
position )below the selling price and reap a profit. The volume of short sales in the
market can be used as a market indicator.as　 a echnical indicator ,short selling is
called short interest. The expectation is that short sellers must eventually cover their
position. This buying activity increases the demand for stocks. Thus short interest
has significance for the market as a whole. Monthly short selling volume is related
the average daily volume ffor the preceding month .thus ,monthly short selling
volume is divided by average daily volume to give a ratio which indicates how many
days of trading it would take to cover up the total Short sales. In general when the
ratio is less than 1.0 , the market is considered to be weakening or overbought .A
decline should follow sooner or later. Values above 1.5 are considered to indicate
that the market is oversold and is likely to turn bullish shortly

The short interest ratio is derived by dividing the reported short interest, or the
number of shares sold short on the New York Stock Exchange, by the average
volume for about 30 days (for example, July 15 to August 15). When short sales
increase relative to the total volume, the indicator rises. A ratio above 150 percent is
considered bullish, and a ratio below 100 percent is considered bearish. As shown in
the chart, during the period under review there have been wide swings in the level of
the short interest ratio. On balance the ratio was bullish more often than it was
bearish. However, the important point is that the peaks in the short interest ratio in
1958, 1962, 1966, and 1970 virtually coincide with the low points in the Standard
and Poor's Index. In contrast, early 1962 was the only incidence of a peak in stock
prices which coincided with a low in short interest ratio. Thus it appears that the
short interest ratio indicates impending advances of stock prices better than it
indicates imminent declines.

ODD-LOT INDEX

Small investors are presumed to buy smaller number of shares that the normal
trading lot of 100 shares .these are known as odd lots and the buyers and sellers of
odd lots are called odd lotters . technical analysts believe that the odd lotters are
inclined to do the wrong thing at critical turns in the market because of their
presumed lack of sophistication

An odd –lot index can be calculated by relating odd-lot purchases to odd-lot

sales. The odd-lot index is abtained by dividing odd-lot purchases by odd-lot sales
.An increase in this index suggest relatively more buying activity and vice versa. At
or near the peak of a bull market ,when the investors should be selling their shares ,
the odd –lot would be buying proportionately more than selling. Thus the odd-lot
index rises noticeably just before a decline in the market . similarly the odd-lot sales
increase greatly causing a fall in the odd-lot index just before a rise in the market.

MUTUAL FUND CASH RATIO

Mutual fund represent one of the most important institutional forces in the
market . mutual fund cash as a percentage of their net asset on a daily or weekly or
monthly basis has been a popular market indicator. Mutual funds keep cash to take
advantage of favourable market opportunities and to provide for redemption of
their units by holders. The theory is that a low cash ratio of ,say about five per
cent ,would indicate a reasonably fully invested position leaving negligible buying
power in their hands. Low cash ratios are equated with market highs ondicating
that the market is about to decline. At market bottoms the cash would be high .This
is an indication of potential purchasing power which can propel a rise in
prices.Thus high mutual fund cash ratio signals a rise in prices of shares.

ABSOLUTE BREADTH INDEX

The Absolute Breadth Index is a market momentum indicator developed by

Norman G. Fosback that displays the activity, volatility, and change taking place on
the New York Stock Exchange. It calculates the difference between the advancing
issues and declining issues and, by dropping the sign (taking the absolute value),
discards the actual direction prices are headed.

By discarding market direction, the ABI functions as an "activity index." High

values indicate market activity and change, while low readings indicate a lack of
change. Fosback has noted historically high values typically lead to higher prices
three to twelve months later. One highly reliable variation of the Absolute Breadth
Index is to divide the weekly ABI by the total issues traded. If after a ten-week
moving average is calculated and readings are above 40%, they are said to be very
bullish. Readings below 15% are bearish.

The Absolute Breadth Index is calculated by subtracting the number of declining

issues from the numberof advancing issues and taking the absolute value of the
difference:

ABI = |Advancing Issues - Declining issues recalling that |-100| = 100 = |+100|

HIGH-LOW DIFFERENTIAL INDEX

The advance-decline line, the high-low indicators produce signals when they
diverge from the action of the indices like the Dow Jones or the S&P 500. It is
considered unhealthy for the market climate if the indices make new highs without
many stocks reaching new highs at the same time. Chart technicians use various
methods to spot divergences from the major market indices.
The High-Low Differential Index produces good longer term signals when it
diverges from the action of the Dow over a prolonged period of time. Daily or
weekly data may be used and the calculation of this indicator is very simple; just
subtract the daily or weekly new lows from the new highs to get the differential and
apply a moving average to smooth out the swings. If you have 479 new highs and 31
new lows on your first week, the reading of your newly created weekly High-Low
Differential Index would be 448

CHALLENGES OF INDICATORS

　 　 For technical indicators, there is a trade-off between sensitivity and

consistency. In an ideal world, we want an indicator that is sensitive to price
movements, gives early signals and has few false signals (whipsaws). If we increase
the sensitivity by reducing the number of periods, an indicator will provide early
signals, but the number of false signals will increase. If we decrease sensitivity by
increasing the number of periods, then the number of false signals will decrease, but
the signals will lag and and this will skew the reward-to-risk ratio.

　 The longer a moving average is, the slower it will react and fewer signals will be
generated. As the moving average is shortened, it becomes faster and more volatile,
increasing the number of false signals. The same holds true for the various
momentum indicators. A 14 period RSI will generate fewer signals than a 5 period
RSI. The 5 period RSI will be much more sensitive and have more overbought and
oversold readings. It is up to each investor to select a time frame that suits his or her
trading style and objectives.

Mathematical indicators

Simple moving average

It gives equal weight to each price point over the specified period. The user defines
whether the high, low, or close is used and these price points are added together and
averaged. This average price point is then added to the existing string and a line is
formed. With the addition of each new price point the sample set drops off the
oldest point. The simple moving average is probably the most widely used moving
average.
Exponential moving average

An exponential moving average multiplies a percentage of the most recent price by

the previous period's average price. Defining the optimum moving average for a
particular currency pair involves "curve fitting". Curve fitting is the process of
selecting the right number of periods with the correct type of moving average to
produce the results the user is trying to achieve. By trial and error, technicians work
with the time periods to fit the price data.
MACD

The MACD (Moving Average Convergence/Divergence) is a momentum indicator

used to show the relationship between two moving averages. The MACD was
developed by Systems and Forecasts publisher, Gerald Appel.

The MACD is simple and reliable. It uses moving averages to include trend-
following characteristics. These lagging indicators are turned into a momentum
oscillator and plotted as a line that moves above and below zero with no upper or
lower limits. The MACD proves most effective in studying wide-swinging trading
markets.

MACD(2lines)

MACD (2-lines) shows the relationship between a 26-day and 12-day Exponential
Moving Average with a 9-day Exponential Moving Average (the "signal" or
"trigger") line plotted on top to show buy/sell opportunities.

Three popular ways to use the MACD are crossovers, overbought/oversold

conditionsanddivergences.

-Crossovers:
The basic MACD trading rule is sell when the MACD falls below its signal line and
buy when the MACD rises above it. It is also common to buy/sell when the MACD g

Overbought/OversoldConditions:
The MACD is also can be used as an overbought/oversold indicator. If the shorter
moving average pulls away dramatically from the longer moving average and the
MACD rises it is likely that the security price is overextended and will soon return
to more realistic levels.

-Divergences:
Expect the end a current trend may be near when the MACD diverges from the
price of a security. A bearish divergence occurs when the MACD is making new
lows while prices fail to match these lows. Likewise, a bullish divergence occurs
when the MACD is making new highs while prices fail to follow suit. Both of these
divergences are most significant when they occur at relatively overbought/oversold
levels.

MACDHistogram

Signals from the MACD Indicator can tend to lag behind price movements. The
MACD Histogram is an attempt to address this situation showing the divergence
between the MACD and its reference line (the 9-day Exponential Moving Average)
by normalizing the reference line to zero. As a result, the histogram signals can
show trend changes well in advance of the normal MACD signal.
A buy signal is generated as the histogram crosses above the zero point. A sell signal
is generated as the histogram crosses below zero.
Relative Strength Index (RSI): RSI measures the momentum of price movements. It
is also plotted on a scale ranging from 0 to 100. Traders will tend to look at RSI
readings over 70 as an indicator of a market that is overbought or susceptible to a
downturn, and readings under 30 as a market that is oversold or ready to turn
higher.This logic therefore implies that prices cannot rise or fall forever and that by
using an RSI study, one can determine with a reasonable degree of certainty when a
reversal will come about. However, be very wary of trading on RSI studies alone. In
many instances, an RSI can remain at very lofty or sunken levels for quite a while
without prices reversing course. At these times, the RSI is simply telling you that a
market is quite strong or quite weak and shows no signs of changing course.
Ways to use Relative Strength Index for chart analysis:
 Tops and bottoms
The Relative Strength Index usually tops above 70 and bottoms below 30. It
usually forms these tops and bottoms before the underlying price chart;
 Chart Formations
The RSI often forms chart patterns such as head and shoulders or triangles
that may or may not be visible on the price chart;
 Failure swing ( Support or Resistance penetrations or breakouts)
This is where the Relative Strength Index surpasses a previous high (peak) or
falls below a recent low (trough);
 Support and Resistance levels
The Relative Strength Index shows, sometimes more clearly than price
themselves, levels of support and resistance.
 Divergences
As discussed above, divergences occur when the price makes a new high (or
low) that is not confirmed by a new high (or low) in the Relative Strength
Index. Prices usually correct and move in the direction of the RSI.
 Calculation:
 RSI = 100-(100/(1+U/D))
 Where:
U — is the average number of positive price changes;
D — is the average number of negative price changes.

Rate of change (ROC): ROC is an oscillator that measures the relationship between
the current price of a share with the price prevailing a few days earlier. ROC
measures the rate of change in prices over a specific period of days on a regular and
continuous basis. The ROC value can be zero,positive or negetive. These values are
plotted on graph with time on X-axis and ROC values on the Y-axis. The ROC
values oscillate around zero. ROC above zero indicates that prices are increasing
and ROC below zero indicates that prices are decreasing.

Ease of Movement

The Ease of Movement Indicator was designed to illustrate the relationship between
volume and price change. It shows how much volume is required to move prices.

High Ease of Movement values occur when prices are moving upward with light
volume. Low values occur when prices are moving downward on light volume. If
prices are not moving or if heavy volume is required to move prices then the
indicator will read near zero.

A buy signal is produced when it crosses above zero (an indication that prices are
more easily moving upward ). A sell signal is produced when the indicator crosses
below zero (prices are moving downward more easily).

Developed by Richard Arms, Jr., perhaps better known for the Arms Index (TRIN),
the formula is as follows:

[ {(H+L)/2} - {(Hp+Lp)/2} ] / [ V/(H-L) ]

Where:
H = Today's high
L = Today's low
Hp = the previous day's high price
Lp = the previous day's low price
V = current day's volume

Aroon Indicator

The Aroon Indicator was developed by Tushar Chande. Its comprised of two plots
one measuring the number of periods since the most recent x-period high (Aroon
Up) and the other measuring the number of periods since the most recent x-period
low (Aroon Down). The plotted value is on a "stochastic" like scale ranging from 0
to 100. So, for example, if in a time-period of 14 days a security makes a new 14-day
high, the Aroon Up = 100. When the security makes a new 14-day low, the Aroon
Down = 100. When the security has not made a new high for 14 days, the Aroon Up
= 0 and when the security has not made a new low for 14 days, the Aroon Down = 0.

When the Aroon Up line reaches 100 it is a sign of strength. If the Aroon Up persists
between 70 and 100, a new uptrend is indicated. Likewise if the Aroon Down line
falls to 100, potential weakness is indicated. If the Aroon Down remains persistently
between 70 and 100, a new downtrend is indicated. A strong uptrend is indicated
when the Aroon Up line persistently remains between 70 and 100 while the Aroon
Down line persistently remains between 0 and 30. Likewise a strong downtrend is
indicated when the Aroon Down line persistently remains between 70 and 100 while
the Aroon Up line persistently remains between 0 and 30.

When the Aroon Down line rises above the Aroon Up line, potential weakness is
indicated and expect prices to begin trending lower. When the Aroon Up line crosses
the Aroon Down line, potential strength is indicated and prices should begin to
trend higher.

When the Aroon Up and Aroon Down Lines move parallel with each other then
consolidation is indicated. Expect further consolidation until a directional move is
indicated either by an extreme level or a crossover.

Aroon is a Sanskrit word meaning "dawn's early light" or the change from night to
day.

Aronoscillator

Developed by Tushar Chande, the Aroon Oscillator is based upon his Aroon
Indicator. Much like the Aroon Indicator, the Aroon Oscillator measures the
strength of a trend.

The Aroon Oscillator is constructed by subtracting Aroon Down from Aroon Up.
Since Aroon Up and Aroon Down oscillate between 0 and +100, the Aroon
Oscillator oscillates between -100 and +100 with zero as the center crossover line.
The Aroon Oscillator signals an uptrend if it is moving towards its upper limit. It
signals a downtrend when it is moving towards the lower limit. The closer the Aroon
Oscillator value is to either extreme the stronger the trend.