Chaikin Oscillator, Bollinger Bands, Momentum and Williams %R

Once again, MarketVolume® is one step ahead of the competition. We are enhancing our services and adding new studies (indicators) to our charts. Right now, our development team put the finishing touches on our new Indexes charts. MarketVolume® is the only source of real-time intraday index volume and advance / decline charts for major US indexes and exchanges. Now, we are raising the bar even further.From now on you may monitorChaikin Oscillator  for U.S. indexes and Exchanges.

• Chaikin Oscillator
• Bollinger Bands
• Momentum
• Williams %R

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Chaikin Oscillator

Chaikin Oscillator (named after its creator) is the next step in accumulation/distribution concept and allows to analyze buying and selling pressure in smaller not growing numbers.

Chaikin Oscillator calculations are based on the applying fast (smaller bar period setting) and slow (bigger bar period setting) exponential moving averages to the Accumulation/Distribution line and calculating the difference between them:

Chaikin Oscillator  = (fast exponential MA of Accumulation/Distribution) - (Slow exponential MA of Accumulation/Distribution)

Principles of Chaikin Oscillator calculation are similar to MACD. In the same way as the MACD-Histogram is used in technical analysis to show moving average crossovers, the Chaikin Oscillator is used to see changes in the Accumulation/Distribution Line. Furthermore, majority of the principles used in MACD to generate trading signals could be used in trading system based on Chaikin Oscillator.

Bollinger Bands

Bollinger Bands was developed by John Bollinger, Bollinger Bands to compare volatility and relative price levels over a selected period of time.

The Bollinger Bands were designed to identify periods of high and low volatility and to define periods when prices are at extreme, and possibly unsustainable, levels. Ability to identify volatility helps to adjust a trading system to generate signals in time and not when its too late or too early. At the same time changes in the volatility may alert to monitor stock (security) for a possible changes in the trend. In this case other technical indicators could become handy and help in determination of a potential reversal.

As a rule, stocks (securities) go through periods of high volatility and low volatility. Historically noticed that the sharp changes in price trend can occur when volatility is low. Bollinger Bands allow visually identify these periods: tight bands indicate low volatility and wide bands indicate high volatility. Volatility can be important for options players as well, simply, because options price depends on the volatility of underlying security and the lower volatility of stock is the cheaper options are on that stock.

In addition to volatility analysis Bollinger Bands may be used in junction with other indicators to predict significant moves. "Double Bottom Buy" and "Double Top Sell" are commonly used techniques in technical analysis to predict Buy and Sell points.

Momentum

Momentum indicator is a simplified version of ROC (Rate of Change) and measures the security's price change over a given time span. The same as ROC Momentum Indicator provides an indication of a market's velocity and to some degree, a measure of the extent to which a trend still holds true.

Momentum Indicator could be used to spot possible reversal points. Both Momentum Indicator and ROC could be used as trend following (lagging) indicators in similar to MACD way: buy when indicator start to move up after hitting a bottom and sell when indicator start to decline after hitting a top.

The Momentum indicator could be used as leading indicator as well. In many cases, Momentum indicator rally up sharply before a reversal down and declines sharply before a reversal up.

Williams %R

Williams %R was developed by Larry Williams and is a momentum technical indicator that is used in technical analysis much like the Stochastic Oscillator. The same as Stochastics, Williams %R serve to define overbought and oversold levels and reading in the range between 0 and minus 20 are considered as overbought while readings in the minus 80 and minus 100 range are considered oversold. The difference between Stochastics and Williams %R indicators is that the first one is always positive and moves between 0 and 100 and second one is always negative and moves in the range between minus 100 and 0.

The same as with Stochastics and other aspects of technical analysis that serve defining overbought/oversold levels, the overbought market (stock, security) does not necessarily imply time to sell and oversold market does not necessarily imply time to buy. A stock (security) could be heavily overbought and still move up while strongly oversold stock may continue to drop pushed by panic selling. It is recommended to wait when Williams %R moves above minus 80 after being below this level (after being oversold) to buy and wait when Williams %R drops below minus 20 after being above it (after being overbought) to sell. One of the conservative approaches could be to wait when Williams %R crosses minus 50 for confirmation of a trend reversal.

Once a security becomes overbought or oversold, traders should wait for a signal that a price reversal has occurred. One method might be to wait for Williams %R to cross above or below -50 for confirmation. Price reversal confirmation can also be accomplished by using other indicators or aspects of technical analysis in conjunction with Williams %R.

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ADX, ADXR, DMI, ABI, Breadth Trust

Once again, MarketVolume® is one step ahead of the competition. Right now, our development team put the finishing touches on our new Indexes charts. MarketVolume® is the only source of real-time intraday index volume and advance / decline charts for major US indexes and exchanges. Now, we are raising the bar even further. From now on you may monitorAbsolute Breadth Index and Breadth Trust  for U.S. indexes and Exchanges.

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ADX (Absolute Directional Index)

The Average Directional Index (ADX) was developed by J. Welles Wilder to evaluate the strength of a trend and to define period of sideway trading.

The ADX is an oscillator that fluctuates between 0 and 100, however reading above 60 are relatively rare. In technical analysis ADX is compared to two levels:

• ADX readings below 20 indicate weak trend;
• ADX readings above 40 indicate strong trend;

The ADX in the Directional Movement system. The higher the ADX value - the stronger the trend. The technical analysis rules state that trend follow systems could be used when ADX is above 25 and when ADX drops below 20 then trend following systems are not recommended for use.

For more info read "ADX" description.

ADXR (Absolute Directional Rating)

ADXR stands for Average Directional Movement Index Rating ADXR is a component of the Directional Movement System developed by Welles Wilder. This system attempts to measure the strength of price movement in positive and negative directions, as well as the overall strength of the trend.

There are several ways of using ADXR:

• The ADXR can be used in the same was as the ADX is used in the Directional Movement system. The technical analysis interpretation is the same as the ADX: the higher the value, the stronger the trend. It results in more conservative trading signals. The ADXR can be used to determine if price movement is sufficiently directional to be worth trading. Welles Wilder's rule is to use trend following trading systems when ADXR is above 25 and when ADXR drops below 20 then do not use a trend following system.
• ADXR  is a lagging indicator that behaves like an Averaged ADX. Furthermore, the ADXR would generate signals after the ADX. In some cases ADXR is used as a signal line applied to ADX. A buy signal occurs when ADX crosses above ADXR, and a sell occurs when ADX crosses below ADXR.

For more info read "ADXR" description.

DMI (Directional Movement Index)

The Directional Movement Index (DX) was developed by J. Welles Wilder of to evaluate the strength of a trend and to define periods of sideway trading.The Directional Movement Index calculations are based on positive Directional Index (+DI) and negative Directional Index (-DI) - you may see the detailed calculation example inADX description.

In most cases Directional Movement Index is used on charts as ADX (Average Directional Movement Index) combined with positive and negative directional indexes. In this case in addition to the ability to use DX or ADX to define strength of a trend, positive and negative directional indexes could be used to generate signals. In its most basic form, buy and sell signals can be generated by +DI and -DI crossovers. In technical analysis it is considered that a buy signal occurs when +DI moves above -DI and a sell signal when -DI moves above the +DI. However, a traders should be aware that when an analyzed security is in a trading range (ADX or DX is below 20), this trading system may produce many false signals and whipsaws.

As with most technical indicators, +DI and -DI crosses should be used in conjunction with other aspects of technical analysis. Since Directional Index is based on the price, the volume based technical analysis could be recommended as a partner to this indicator in atrading system.

For more info read "DMI" description.

ABI (Absolute Breadth Index)

The Absolute Breadth Index (ABI) was developed by Norman G. Fosback and described in his book "Stock Market Logic". The ABI is market indicator that is used in technical analysis to determine volatility levels in the market without factoring in price direction. Referred to as a market momentum indicator, the absolute breadth index (ABI) is equal to the absolute value of the difference between the advancing issues and the declining issues. It shows how much activity and volatility and change is taking place on the NYSE or any other index and corresponding market sector.

Typically, large ABI numbers suggest volatility is increasing, which is likely to cause significant changes in stock prices in the coming weeks. If the ABI index readings have low value it point that no changes are taking place. Fosback found that a highly reliable variation of the ABI is to divide the weekly ABI by the total issues traded. If after 10 weeks moving average is calculated and readings are less than 15% they are called "bearish". Readings higher than 40% are called "bullish".

For more info read "Absolute Breadth Index" description.

Breadth Trust

The Breadth Thrust indicator was developed by Dr. Martin Zweig and is considered as a market momentum indicator. Traditionally the Breadth Thrust is calculated by dividing a 10-day exponential moving average of the number of advancing issues, by the number of advancing plus declining issues. Breadth thrust is an internal indicator that is somewhat more complicated. It is a ratio of moving averages that creates an excellent judge of market momentum.

In technical analysis Breadth Thrust can be read just like a stochastic or RSI, where overbought and oversold levels are at the extremes. Divergence with the underlying price chart points to weakening momentum. The number of days to set for the moving averages should be determined by the time-period being evaluated.

According to Dr. Zweig a "Breadth Thrust" occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A "Thrust" indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.

For more info read "Breadth Trust" description.

AD Line and TRIX

Once again, MarketVolume® is one step ahead of the competition. Right now, our development team put the finishing touches on our new Indexes charts. MarketVolume® is the only source of real-time intraday index volume and advance / decline charts for major US indexes and exchanges. Now, we are raising the bar even further. From now on you may monitor Advance Decline Line  for U.S. indexes and Exchanges.

• Advance Decline Line
• TRIX and TRIX 2 Line
• Standard Deviation

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Advance Decline Line

Advance Decline Line is one of the well known breadth indicator in technical analysis.  Initially Advance Decline Line (AD Line) has been applied to NYSE (New York Stock Exchange), yet, we are the first who started to provide this technical indicators for other indexes and exchanges which allows to use AD Line to analyze smaller stock market sectors.

As with all other breadth indicators AD line could be applied to the basked of stocks only and is based on the Advance/Decline Issues, however we are the first who started to apply the Advance Decline Line formula to volume of advances and declines as well as we are first who started to monitor AD Line on intraday charts.

Below you may see the S&P 500 advance decline line and advance decline volume line.

Chart 1: S&P 500 index - Advance Decline Line.

TRIX and TRX 2 Line

TRIX displays the percent rate-of-change of a triple exponentially smoothed moving average of a security's closing price in order to eliminate price movements that are insignificant to the larger trends by reducing price volatility.

Below you may see S&P 500 60-day (1 bar = 1 hour) chart example of using TRIX indicator in hypothetical trading system that generates "Buy/Sell Signals" on crossovers of TRIX and zero line around which TRIX oscillates.

Chart 2: S&P 500 index - TRIX.

Another way of using TRIX is to use it with "Signal Line". On the chart below (see chart #2) you may see example of TRIX trading system that generates signals on TRIX and "Signal Line" crossovers.

Chart 3: S&P 500 index - TRIX 2 line (Signal Line).

If you compare chart #1 to the chart #2, you may notice that with the same setting the second trading system is more sensitive and may earlier spot trend reversals. However at the same time the second trading system would generate more signals and as a result probability of fake signals is higher. Furthermore depending on the trading style one trader may prefer using TRIX while other may select TRIX with "Signal Line".

Standard Deviation

The Standard Deviation is used in technical analysis and trading systems to measures stock's volatility statistically by showing the difference of the prices from the average one. Normally, this indicator is used as a constituent of other indicators.

One of use of the Standard deviation is to confirm the down-trend and up-trend. As a rule, during the up-trend the market is less volatile while during the downtrend and market crashes we may witness high volatility which is caused by panic selling.

In trading systems Standard Deviation (as other volatility indicators) is used to define periods of the volatility and adjust used technical indicators setting to it. It is well know that in high volatile market the price trend changes faster and trading system should react on the signals faster, otherwise it could be too late to open/close a trade. At the same time in low volatile market a trader may set the trading system to generate signals with delay to avoid situation of premature opened/closed trades.

Chart 4: S&P 500 index - Standard Deviation.

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