A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1 and 2. Since the first actionary wave,

Fibonacci studies: arcs, fans, retracements, and time

Overview: Leonardo Fibonacci was a mathematician who was born in Italy around the year 1170. It is believed that Mr. Fibonacci discovered..


The Negative Volume Index (“NVI”) focuses on days where the volume decreases from the previous day. The premise being that the “smart money” takes positions on days when volume decreases

Basic Technicals

MACD technical analysis MACD technical analysis stands for moving average convergence/divergence analysis of stocks.

Fundamental Analysis

Doubling Stocks Review: Is this a scam? If you are looking for the truth about doubling stocks this is a necessity. One always thought there was something wrong with a doubling of stocks.

Saturday, January 30, 2010

Swing Trading Using Candlestick charting with Pivot Point Analysis

Pivot Point Analysis is a famous technique that is used as a price forecasting method for day Traders and professional traders as well.It is very popular among professionals.You should have a better understanding of this method after reading and studying this Text and the benefits to you may help improve your timing of entry and exit points of the market.
There are numerous advisory services, brokerage firms and independent traders that use one form of it or another.support/Resistance, price range forecasting pin pointing tops and bottoms and target trading are some of the terms that are used to refer to it as well.
First here is the mathematical formula where P=Pivot Point; C=Close;H=High:and L=Low.
The Pivot point number is the high,low,close added up and then divided by three.P=(H+L+C)/3=pivot point.Now for the first resistance level take the pivot point number times two and then subtract the low.(Px2)-L=Resistance 1.For the second resistance,take the pivot point number add the high and then subtract the low.P+H-L+Resistance 2.
For the first support take the pivot point number times two and then subtract the high.(Px2)-H=support 1
For the second support,take the pivot point number sustract the high and then and the low.P-H+L=Support 2.
Copyright ©2002 by John L. Person III, CTA Written by John L.Person


The cult of Elliott Wave Theory intimidates the most experienced traders. But don’t let wave voodoo stop you from adding important elements to your chart analysis. Strong trends routinely print orderly action-reaction waves. EWT uncovers these predictive patterns through their repeating count of 3 primary waves and 2 countertrend ones.
Wave impulses correspond with the crowd’s emotional participation. A surging 1st Wave represents the fresh enthusiasm of an initial breakout. The new crowd then hesitatesand prices drop into a countertrend 2nd Wave. This coils the action for the sudden eruption of runaway 3rd Wave.Then after another pullback, the manic crowd exhausts itself in a final 5th Wave blowoff.
Traders can capitalize on trend waves with very little knowledge of the underlying theory. Just look for the 5-wave trend structure in all time frames. Locate smaller waves embedded in larger ones and place trades at points where two or more time frames intersect. These cross verification zones capture major trend, reversal and breakout points.
For example, the 3rd wave of a primary trend often exhibits dynamic vertical motion. This single thrust may hide a complete 5-wave rally in the next smaller time frame. With this knowledge execute a long position at the 3rd Of A 3rd,one of the most powerful price movements within an entire uptrend. While waves seem hard to locate, the trained eye can uncover these price patterns in many strong uptrends.
Many 3rd waves trigger broad Continuation Gaps.These occur just as emotion replaces reason and frustrate many good traders. Since common sense dictates the surging stock should retrace, many exit positions on the bar just prior to the big gap. Use timely wave analysis (and a strong stomach) to anticipate this big move just before it occurs.
4th Wave corrections set the sentiment mechanics for the final 5th wave. The crowd experiences its first emotional setback as this countertrend generates fear through a sharp downturn or long sideways move. The same momentum signals that carry traders into positions now roll over and turn against them.
The greedy crowd ignites a powerful December rally in AMGN.
Note the embedded 5 wave patterns, typical with surging uptrends. The 3rd of a 3rd identifies the most dynamic momentum expected in a sharp price move.

As they prepare to exit, the trend suddenly reawakens and price again surges. During this final 5th wave, the crowd loses good judgement. Both parabolic moves and aborted rallies occur here with great frequency. Survival through the last sharp countertrend adds an unhealthy sense of invulnerability into the crowd mechanics. Movement becomes unpredictable and the uptrend ends suddenly just as the last greedy participant jumps in.
When trend finally turns back through old price, skilled traders then use past action to identify effective momentum and swing trades. Battles between bulls and bears leave a scarred landscape of unique charting features. For example, gaps provide one of the most profitable setups in all of technical analysis. Continuation gaps rarely fill on the first try, except with another gap. Use a tight stop and execute your trade in the direction of support as soon as price enters the gap on high volatility.
Past breaks in support identify low risk short sales. The more violent the break, the more likely it will resist penetration. Head and Shoulders, Rectanglesand Double Tops leave their mark with strong resistance levels. These patterns often print multiple doji and hammer lows prior to a final break as insiders clean out stops at the extremes of the pattern.
Clear Air prints a series of wide range bars as price thrusts from one stable level to an other. Rapid price movement tends to repeat each time that trading enters its boundaries. Potential reward spikes sharply through these unique zones. But watch out. Reversals tend to be sharp and vertical as well. Tight stops are advised.
Pattern Cycles recognize that important features may not be horizontal. What the eye resolves as uptrend or downtrend contains multiple impulses shooting out in many directions. The most common of these is the Parallel Price Channel.Use these price extremes to enter contrary positions with stop losses just on the other side of the parallel trendlines.
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Thursday, January 28, 2010

Pattern Cycles

Price marks territory as it spikes relative highs and lows within all time frames. Skilled traders observe this signature behavior throughout all markets and all historical charting. Relative direction also characterizes price movement. A series of lower lows and lower highs identify downtrends while uptrend print a sequence of higher highs and higher lows.
As bulls and bears fight for control, Pattern Cycles are born. Since markets won’t travel upward to infinity or downward below zero, identifiable swing trades appear within each time frame. Driven by emotional behavior, trend inhales and exhales.Falling price ignites fear as paper profits evaporate. Fresh rallies awaken greed, inviting momentum players to become greater fools. On and on it goes.
Bottoms exist as a direct result of this trend physics. The natural movement of impulse and reaction dictates that twounique formations must develop at some point within each at-tern Cycle. In an uptrend, a lower high must eventually follow a higher high and mark a new top. In a downtrend, the sequence of lower lows ends when price prints a higher low. This second event marks the birth of the Double Bottom.
Double bottoms draw their predictive power from the trends that precede them. As a series of lower lows print on a bar chart, downtrends often accelerate. The trading crowd notices and develops a gravity bias that expects the fall to continue unabated. Then suddenly the last low appears to hold. The crowd takes notice and bottom fishers slowly enter new positions. Price stability then triggers more and more players to recognize the potential pattern and jump in.
Stock percentage growth potential peaks at the very beginning of a new uptrend. For this reason, being “right” at a bottom can produce the highest profit of any trade. But picking bottoms can be a very dangerous game. Smart traders weigh all evidence at their disposal before taking the leap. And strict risk discipline must still be exercised to ensure a safe exit if proven wrong.
Eve’s rounded bottom takes longer to form than the sharp Adam spike. Look for volume to decrease as the stock heals and prepares for a new uptrend. Adam and Eve formations aren’t limited to bottoms. Watch for them at the end of parabolic rallies.

The Adam and Eve Reversal illustrates the importance of the center peak in the creation of Double Bottoms. A very sharp and deep first bottom (Adam) initiates this DB pattern. The stock then bounces high into a center retracement before falling into a gentle, rolling second bottom (Eve). Price action finally constricts into a tight range before the stock breaks strongly to the upside.
Many times the top of Eve prints a flat shelf that marks an excellent entry point.Shelf resistance typically develops right along the top of the center retracement pivot. The relationship between this center pivot and current price marks an important focal point as the skilled trader closely watches the development of a suspected double bottom pattern.
Since bottoms occur in downtrends, risk must be managed defensively. The greedy eye wants to believe the immature formation and is easily fooled. Even spectacular reversals offer little profit if price can’t ascend back out of the hole it found itself in. When choosing stop and exit points, violation of aprior low is the natural first choice. Make certain your entry permits you to exit for an acceptable loss at this location. And don’t stick around long. Price will gather downside momentum quickly at broken lows as it searches for new support.
Successfulbottom entry takes a strong stomach. Even when all the technicals line up, sentiment will be highly negative at these turning points. The potential for short-term profit though is outstanding. In addition to other longs ready to speculate on a good upside move, high short interest will fuel explosive impulses off these levels. Perhaps for this reason alone, serious traders can’t ignore double bottom patterns.
The Big W pattern can be identified in all time frames and all markets. It is apowerful tool for locating bottom trade entry.
The Big Wreference pattern maps the entire bottom reversal process. This signpost identifies key pivots and flashes early warning signals.
The pattern begins at a stock’s last high, just prior to the first bottom. The first bounce after this low marks the center of the W as it retraces between 38% and 62% of that last downward move.
This rally fades and price descends back toward a test of the last low. The smart trader then listens closely for the first bell to ring. A wide range reversal bar (doji or hammer) may appear close to the low price of the last bottom. Or volume spikes sharply but price does not fail. Better yet, a Turtle Reversalprints where price violates the last low by a few ticks and then bounces sharply back above support. When any or all of these events occur, focus your attention on the second leg of this Big W.
Then expect another upward leg. Price at this level has a high probability of moving even higher. It can easily retrace 100% of the original downward impulse, completing both the Double Bottom and Big W patterns. This tendency allows for further entry at the first pullback to the center pivot after the next break.
Significant declines evolve into long bottoms characterized by failed rallies and retesting of prior lows. As new accumulation slowly shakes out the last crowd oflosers, a stock’s character changes. Prices push toward the top of key resistance. Short-term relative strength improves and the chart exhibits a series of bullish price bars with closing ticks near their highs. Finally the issue begins a steady march through thewall marked with past failures.
Stocks must overcome gravity to enter new uptrends. Value players build bases but can’t supply the critical force needed to fuel rallies. Fortunately, the momentum crowd arrives just in time to fill this chore. As a stock slowly rises above resistance,greed rings a loud bell and these growth players jump in all at the same time.
The appearance of a sharp breakout gap has tremendous buy power. But the skilled trader should remain cautious when the move lacks heavy volume. Bursts of enthusiastic buying must draw wide attention that ignites further price expansion. When strong volume fails to appear, the gap may fill quickly and trap the emotional longs. Non-gapping, high volume surges provide a comfortable price floorsimilar to gaps. But support can be less dependable, forcing a stock to swing into a new range rather than rise quickly.
Fortunately this scenario sets up good pullbacktrades. The uptrend terrain faces predictable obstacles marked by Clear Airpockets and congestion from prior downtrends. These barriers can force frequent dips that mark good buying opportunities. The trader must identify these profitable zones in advance and be ready to act.
Aggressive traders can initiate entry near the bottom of this second leg when the bell rings loudly. The middle of the W now becomes your pivot for further execution. For price to jump to this level, it must retrace 100% of the last decline. This small move finally breaks the falling bear cycle.
Enter less aggressive positions when this emerging second bottom retraces through 62% of the fall into the second low. But sufficient profit must exist between that entry and the W center top for this trade to work. Longer-term traders can hold positions as price pierces this pivot. Be patient since price will likely pause to test support here.
Gap breakouts are more likely to rise toward higher prices immediately than simple volume breakouts. Waiting for a dip may be futile. Extreme crowd enthusiasm ignites continued buying at higher levels and market makers don’t need pullbacks to generate volume. If entry is desired, use a trend-following strategy and manage risk with absolute price or percentage stop loss.

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Tuesday, January 19, 2010

Who was Fibonacci?

Leonardo Pisano, was Italian mathematician born in Pisa during the The middle Ages. He was renowned as one of the most talented mathematicians of his day.The name Fibonacci itself was a nickname given to Leonardo. It was derived from his grandfather’s name and means son of Bonaccio.
While most attribute the Fibonacci Sequence to Leonardo, he was not responsible for discovering the sequence. In 1202 Leonardo published a book called, Liber Abaci. In it he derived a method for calculating the growth of the rabbit population.
This mathematical progression is now recognized as the Fibonacci Sequence.  Starting with zero and adding one, each new number in the sequence is the sum of the previous two numbers. In our example, 0+1 = 1, 1+1=2, 1+2=3, 2+3=5 so on.
Fibonacci as a Technical Analysis Tool
While there have been countless books and articles written on the use of Fibonacci in technical analysis, the basics are simple.
On the price scale, these ratios, and several others related to the Fibonacci sequence,often indicate levels at which strong resistance and support will be found. Many times, markets tend to reverse right at levels that coincide with the
Fibonacci ratios.  On the time scale Fibonacci ratios are one method of identifying potential market turning points. When Fibonacci levels of price and time coincide you have high probability entry points.
In the next few pages I will talk about how I use the two most common applications of Fibonacci:
Price Retracements – Astrategy for quality entry points
Price Extensions – A approach to determing how far price will run
Then after we have convered the basics we will talk about bring it all together and using both Fibonacci Retracement and FibonacciExtensions at same time and how clustering of these ratios increases the probability of profit.
While there are many variations of the ratio set, simple is better, let’s focus on four major retracement levels.
23.6%–The shallowest of the retracements.In very strong trending markets price typically quickly bounces in the area of the ratio.
38.2%–This is the first line of defense of the current trendf.Breaking this level starts to erode the underlying trend.
50%–The neutral point of any retracement.This is the critical tipping point.
61.8%–retracing to this typically signals a breaksdown in the trend.
100%–Matching the move.
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Monday, January 18, 2010

Indicator_ZIG ZAG

The Zig Zag indicator filters out changes in an underlying plot (e.g., a security’s price or another indicator) that are less than a specified amount. The Zig Zag indicator only shows significant changes.
The Zig Zag indicator is used primarily to help you see changes by punctuating the most significant reversals.It is very important to understand that the last “leg” displayed in a Zig Zag chart can change based on changes in the underlying plot (e.g., prices). This is the only indicator in this book where a change in the security’s price can change a previous value of the indicator. Since the Zig Zag indicator can adjust its values based on subsequent changes in the underlying plot, it has perfect hindsight into what prices have done. Please don’t try to create a trading system based on the Zig Zag indicator–its hindsight is much better than its foresight!In addition to identifying significant prices reversals, the Zig Zag indicator is also useful when doing Elliot Wave counts.For additional information on the Zig Zag indicator, refer to
Filtered Waves by Arthur Merrill.
The following chart shows the 8% Zig Zag indicator plotted on top of Mattel’s bar chart.

This Zig Zag indicator ignores changes in prices that are less than 8%.
The Zig Zag indicator is calculated by placing imaginary points on the chart when prices reverse by at least the specified amount. Straight lines are then drawn to connect these imaginary points.
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(pronounced “percent R”) is a momentum indicator that measures overbought/oversold levels. Williams %R was developed by Larry Williams.
The interpretation of Williams’ %R is very similar to that of the Stochastic Oscillator except that %R is plotted upside-down and the Stochastic Oscillator has internal smoothing.
To display the Williams %R indicator on an upside-down scale, it is usually plotted using negative values (e.g., -20%). For the purpose of analysis and discussion, simply ignore the negative symbols.
Readings in the range of 80 to 100% indicate that the security is oversold while readings in the 0 to 20% range suggest that it is overbought.
As with all overbought/oversold indicators, it is best to wait for the security’s price to change direction before placing your trades. For example, if an overbought/oversold indicator (such as the Stochastic Oscillator or Williams’ %R) is showing an overbought condition, it is wise to wait for the security’s price to turn down before selling the security. (The MACD is a good indicator to monitor change in a security’s price.) It is not unusual for overbought/oversold indicators to remain in an overbought/oversold condition for a long time period as the security’s price continues to climb/fall. Selling simply because the security appears overbought may take you out of the security long before its price shows signs of deterioration.An interesting phenomena of the %R indicator is its uncanny ability to anticipate a reversal in the underlying security’s price. The indicator almost always forms a peak and turns down a few days before the security’s price peaks and turns down. Likewise, %R usually creates a trough and turns up a few days before the security’s price turns up.
The following chart shows the OEX index and its 14-day Williams’ %R. I drew “buy” arrows each time the %R formed a trough below 80%. You can see that in almost every case this occurred one or two days before the prices bottomed.

The formula used to calculate Williams’ %R is similar to the Stochastic Oscillator:

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Friday, January 15, 2010


Accumulation is a term used to describe a market controlled by buyers; whereas distribution is defined by a market controlled by sellers.
Williams recommends trading this indicator based on divergences:
1.Distribution of the security is indicated when the security is making a new high and the A/D indicator is failing to make a new high. Sell.
2.Accumulation of the security is indicated when the security is making a new low and the A/D indicator is failing to make a new low. Buy.
The following chart shows Proctor and Gamble and the Williams’ Accumulation/Distribution indicator.

A bearish divergence occurred when the prices were making a new high (point “A2″) and the A/D indicator was failing to make a new high (point “A1″). This was the time to sell.
To calculate Williams’ Accumulation/Distribution indicator, first determine the True Range High (“TRH”) and True Range Low (“TRL”).

Today’s accumulation/distribution is then determined by comparing today’s closing price to yesterday’s closing price.
If today’s close is greater than yesterday’s close:

If today’s close is less than yesterday’s close:
If today’s close is equal to yesterday’s close:

The Williams’ Accumulation/Distribution indicator is a cummulative total of these daily values.

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The Weighted Close indicator is simply an average of each day’s price. It gets its name from the fact that extra weight is given to the closing price. The Median Price and Typical Price are similar indicators.
When plotting and back-testing moving averages, indicators, trendlines, etc, some investors like the simplicity that a line chart offers. However, line charts that only show the closing price can be misleading since they ignore the high and low price. A Weighted Close chart combines the simplicity of the line chart with the scope of a bar chart, by plotting a single point for each day that includes the high, low, and closing price.
The following chart shows the Weighted Close plotted on top of a normal high/low/close bar chart of People soft.

The Weighted Close indicator is calculated by multiplying the close by two, adding the high and the low to this product, and dividing by four. The result is the average price with extra weight given to the closing price.

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Wednesday, January 13, 2010


The Volume Oscillator displays the difference between two moving averages of a security’s volume. The difference between the moving averages can be expressed in either points or percentages.
You can use the difference between two moving averages of volume to determine if the overall volume trend is increasing or decreasing. When the Volume Oscillator rises above zero, it signifies that the shorter-term volume moving average has risen above the longer-term volume moving average, and thus, that the short-term volume trend is higher (i.e., more volume) than the longer-term volume trend.
There are many ways to interpret changes in volume trends. One common belief is that rising prices coupled with increased volume, and falling prices coupled with decreased volume, is bullish. Conversely, if volume increases when prices fall, and volume decreases when prices rise, the market is showing signs of underlying weakness.
The theory behind this is straight forward. Rising prices coupled with increased volume signifies increased upside participation (more buyers) that should lead to a continued move. Conversely, falling prices coupled with increased volume (more sellers) signifies decreased upside participation.
The following chart shows Xerox and 5/10-week Volume Oscillator.

I drew linear regression trendlines on both the prices and the Volume Oscillator.
This chart shows a healthy pattern. When prices were moving higher, as shown by rising linear regression trendlines, the Volume Oscillator was also rising. When prices were falling, the Volume Oscillator was also falling.
The Volume Oscillator can display the difference between the two moving averages as either points or percentages. To see the difference in points, subtract the longer-term moving average of volume from the shorter-term moving average of  volume:

To display the difference between the moving averages in percentages, divide the difference between the two moving averages by the shorter-term moving average:

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Tuesday, January 12, 2010


The Relative Strength Index (“RSI”) is a popular oscillator. It was first introduced by Welles Wilder in an article in Commodities (now known as Futures) Magazine in June, 1978. Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder’s book, New Concepts in Technical Trading Systems.The name “Relative Strength Index” is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be “Internal Strength Index.” Relative strength charts that compare two market indices, which are often referred to as Comparative Relative Strength.
When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and 25-day RSIs have also gained popularity. Because you can vary the number of time periods in the RSI calculation, I suggest that you experiment to find the period that works best for you. (The fewer days used to calculate the RSI, the more volatile the indicator.)
The RSI is a price-following oscillator that ranges between 0 and 100. A popularmethod of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a “failure swing.” The failure swing is considered a confirmation of the impending reversal.In Mr. Wilder’s book, he discusses five uses of the RSI in analyzing commodity charts. These methods can be applied to other security types as well.
Tops and Bottoms.
The RSI 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 (page 215) or triangles (page 216) that may or may not be visible on the price chart.
Failure Swings.
(also known as support or resistance penetrations or breakouts). This is where the RSI surpasses a previous high (peak) or falls below a recent low (trough).
Support and Resistance.
The RSI shows, sometimes more clearly than price themselves, levels of support and resistance.
Makes a new high (or low) that is not confirmed by a new high (or low) in the RSI. Prices usually correct and move in the direction of the RSI.
The following chart shows PepsiCo and its 14-day RSI.

A bullish divergence occurred during May and June as prices
were falling while the RSI was rising. Prices subsequently corrected and trended upward.
The RSI is a fairly simple formula, but is difficult to explain without pages of examples. Refer to Wilder’s book for additional calculation information. The basic formula is:


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The Price Oscillator displays the difference between two moving averages of a securitys price. The difference between the moving averages can be expressed in either points or percentages.
The Price Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two user-specified moving averages. (The MACD always uses 12- and 26-day moving averages, and always expresses the difference in points.)
Moving average analysis typically generates buy signals when a short-term moving average (or the securitys price) rises above a longer-term moving average. Conversely, sell signals are generated when a shorter-term moving average (or the securitys price) falls below a longer-term moving average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these one- or two-moving-average
The following chart shows Kellogg and a 10-day/30-day Price Oscillator. In this example, the Price Oscillator shows the difference between the moving averages as percentages.
I drew buy arrows when the Price Oscillator rose above zero and sell arrows when the indicator fell below zero. This example is typical of the Price Oscillators effectiveness. Because the Price Oscillator is a trend-following indicator, it does an outstanding job of keeping you on the right side of the market during trending periods (as show by the arrows labeled B, E, and F). However, during less decisive periods, the Price Oscillator produces small losses (as shown by the arrows labeled A, C, and D).

When the Price Oscillator displays the difference between the moving averages in points, it subtracts the longer-term moving average from the short-term average:

When the Price Oscillator displays the difference between the moving averages in percentages, it divides the difference between the averages by the shorter-term moving average:

The Price Rate-of-Change (“ROC”) indicator displays the difference between the current price and the price x-time periods ago. The difference can be displayed in either points or as a percentage. The Momentum indicator displays the same information, but expresses it as a ratio.
It is a well recognized phenomenon that security prices surge ahead and retract in a cyclical wave-like motion. This cyclical action is the result of the changing expectations as bulls and bears struggle to control prices.The ROC displays the wave-like motion in an oscillator format by measuring the amount that prices have changed over a given time period. As prices increase, the ROC rises; as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC.
The time period used to calculate the ROC may range from 1-day (which results in a volatile chart showing the daily price change) to 200-days (or longer). The most popular time periods are the 12- and 25-day ROC for short to intermediate-term trading. These time periods were popularized by Gerald Appel and Fred Hitschler in their book, Stock Market Trading Systems.
The 12-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/over-sold indicators, it is prudent to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend.
The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular cycle. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.

I drew “buy” arrows each time the ROC fell below, and then rose above, the oversold level of -6.5. I drew “sell” arrows each time the ROC rose above, and then fell below, the overbought level of +6.5.
The optimum overbought/oversold levels (e.g., 6.5) vary depending on the security being analyzed and overall market conditions. I selected 6.5 by drawing a horizontal line on the chart that isolated previous “extreme” levels of Walgreen’s 12-day ROC.
When the Rate-of-Change displays the price change in points, it subtracts the price x-time periods ago from today’s price:

When the Rate-of-Change displays the price change as a percentage, it divides the price change by price x-time period’s ago:

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Friday, January 8, 2010


In 1897, Charles Dow developed two broad market averages. The “Industrial Average” included 12 blue-chip stocks and the “Rail Average” was comprised of 20 railroad enterprises. These are now known as the Dow Jones Industrial Average and the Dow Jones Transportation Average.
1. The Averages Discount Everything.An individual stock’s price reflects everything that is known about the security. As new information arrives, market participants quickly disseminate the information and the price adjusts accordingly. Likewise, the market averages discount and reflect everything known by all stock market participants.
2. The Market Is Comprised of Three Trends.At any given time in the stock market, three forces are in effect: the Primary trend, Secondary trends, and Minor trends.
The Primary trend can either be a bullish (rising) market or a bearish (falling) market. The Primary trend usually lasts more than one year and may last for severalyears. If the market is making successive higher-highs and higher-lows the primary trend is up. If the market is making successive lower-highs and lower-lows, the primary trend is down.
Secondary trends are intermediate, corrective reactions to the Primary trend. These reactions typically last from one to three months and retrace from one-third to two-thirds of the previous Secondary trend. The following chart shows a Primary trend (Line “A”) and two Secondary trends (“B” and “C”).
Minor trends are short-term movements lasting from one day to three weeks. Secondary trends are typically comprised of a number of Minor trends. The Dow Theory holds that, since stock prices over the short-term are subject to some degree of manipulation (Primary and Secondary trends are not), Minor trends are unimportant and can be misleading.
3. Primary Trends Have Three Phases.
The Dow Theory says that the First phase is made up of aggressive buying by informed investors in anticipation of economic recovery and long-term growth. The general feeling among most investors during this phase is one of “gloom and doom” and “disgust.” The informed investors, realizing that a turnaround is inevitable, aggressively buy from these distressed sellers.
The Second phase is characterized by increasing corporate earnings and improved economic conditions. Investors will begin to accumulate stock as conditions improve.The Third phase is characterized by record corporate earnings and peak economic conditions. The general public (having had enough time to forget about their last “scathing”) now feels comfortable participating in the stock market–fully convinced that the stock market is headed for the moon. They now buy even more stock, creating a buying frenzy. It is during this phase that those few investors who did the aggressive buying during the First phase begin to liquidate their holdings in anticipation of a downturn.
The following chart of the Dow Industrial illustrates these three phases during the years leading up to the October 1987 crash.

In anticipation of a recovery from the recession, informed investors began to accumulate stock during the First phase (box “A”). A steady stream of improved earnings reports came in during the Second phase (box “B”), causing more investors to buy stock. Euphoria set in during the Third phase (box “C”), as the general public began toaggressively buy stock.
4. The Averages Must Confirm Each Other.The Industrials and Transports must confirm each other in order for a valid change of trend to occur. Both averages must extend beyond their previous secondary peak (or trough) in order for a change of trend to be confirmed.
The following chart shows the Dow Industrials and the Dow Transports at the beginning of the bull market in 1982.
6. A Trend Remains Intact Until It Gives a Definite Reversal Signal.
An up-trend is defined by a series of higher-highs and higher-lows. In order for an up-trend to reverse, prices must have at least one lower high and one lower low (the reverse is true of a downtrend).
When a reversal in the primary trend is signaled by both the Industrial and Transports, the odds of the new trend continuing are at their greatest. However, the longer a trend continues, the odds of the trend remaining intact become progressively smaller. The following chart shows how the Dow Industrials registered a higher high (point “A”) and a higher low (point “B”) which identified a reversal of the down trend (line “C”).

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An envelope is comprised of two moving averages. One moving average is shifted upward and the second moving average is shifted downward.
Interpretation Envelopes define the upper and lower boundaries of a security’s normal trading range. A sell signal is generated when the security reaches the upper band whereas a buy signal is generated at the lower band. The optimum percentage shift depends on the volatility of the security–the more volatile, the larger the percentage.
The logic behind envelopes is that overzealous buyers and sellers push the price to the extremes (i.e., the upper and lower bands), at which point the prices often stabilize by moving to more realistic levels. This is similar to the interpretation of Bollinger Bands.
The following chart displays American Brands with a 6% envelope of a 25-day exponential moving average.

You can see how American Brands’ price tended to bounce off the bands rather than penetrate them.
Envelopes are calculated by shifted moving averages. In the above example, one 25-day exponential moving average was shifted up 6% and another 25-day moving average was shifted down 6%.
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Thursday, January 7, 2010


The Commodity Channel Index (“CCI”) measures the variation of a security’s price from its statistical mean. High values show that prices are unusually high compared to average prices whereas low values indicate that prices are unusually low. Contrary to its name, the CCI can be used effectively on any type of security, not just commodities.The CCI was developed by Donald Lambert.
There are two basic methods of interpreting the CCI: looking for divergences and as an overbought/oversold indicator.
A divergence occurs when the security’s prices are making new highs while the CCI is failing to surpass its previous highs. This classic divergence is usually followed by a correction in the security’s price.
The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator, readings above +100 imply an overbought condition (and a pending price correction) while readings below -100 imply an oversold condition (and a pending rally).
The following chart shows the British Pound and its 14-day CCI. A bullish divergence occurred at point “A” (prices were declining as the CCI was advancing). Prices subsequently rallied. A bearish divergence occurred at point “B” (prices were advancing while the CCI was declining). Prices corrected. Note too, that each of these divergences occurred at extreme levels (i.e., above +100 or below -100) making them even more significant.
A complete explanation of the CCI calculation is beyond the scope of this book. The following are basic steps involved in the calculation:
1.Add each period’s high, low, and close and divide this sum by 3. This is the typical price.
2.Calculate an n-period simple moving average of the typical prices computed in Step 1.
3.  For each of the prior n-periods, subtract today’s Step 2 value from Step 1′s valuen days ago. For example, if you were calculating a 5-day CCI, you would perform five subtractions using today’s Step 2 value.
4.Calculate an n-period simple moving average of the absolute values of each of the results in Step 3.
5.Multiply the value in Step 4 by 0.015.
6.Subtract the value from Step 2 from the value in Step 1.
7.Divide the value in Step 6 by the value in Step 5.
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Basic Technicals_CANSLIM

CANSLIM is an acronym for a stock market investment method developed by William O’Neil. O’Neil is the founder and chairman of Investor’s Business Daily, a national business newspaper. He also heads an investment research organization, William O’Neil & Company, Inc.Drawing from his study of the greatest money-making stocks from 1953 to 1985, O’Neil developed a set of common characteristics that each of these stocks possessed.
The key characteristics to focus on are captured in the acronym CANSLIM.
Current quarterly earnings per share
Annual earnings growth
New products, New Management, New Highs
Shares outstanding
Leading industry
Institutional sponsorship
Market direction
Although not strictly a technical analysis tool, the CANSLIM approach combines worthy technical and fundamental concepts. The CANSLIM approach is covered in detail in O’Neil’s book, How To Make Money In Stocks.
The following text summarizes each of the seven components of the CANSLIM method.Current Quarterly Earnings Earnings per share (“EPS”) for the most recent quarter should be up at least 20% when compared to the same quarter for the previous year (e.g., first quarter of 1993 to the first quarter of 1994).
Annual Earnings Growth Earnings per share over the last five years should be increasing at the rate of at least 15% per year. Preferably, the EPS should increase each year. However, a single year set-back is acceptable if the EPS quickly recovers and moves back into new high territory.
New Products, New Management, New HighsA dramatic increase in a stock’s price typically coincides with something “new.” This could be a new product or service, a new CEO, a new technology, or even new high stock prices.One of O’Neil’s most surprising conclusions from his research is contrary to what many investors feel to be prudent. Instead of adhering to the old stock market maxim, “buy low and sell high,” O’Neil would say, “buy high and sell higher.” O’Neil’s research concluded that the ideal time to purchase a stock is when it breaks into new high territory after going through a two to 15 month consolidation period. Some of the most dramatic increases follow such a breakout, due possibly to the lack of resistance (i.e., sellers).
Shares Outstanding
More than 95% of the stocks in O’Neil’s study of the greatest stock market winners had less than 25 million shares outstanding. Using the simple principles of supply and demand, restricting the shares outstanding forces the supply line to shift upward which results in higher prices.
A huge amount of buying (i.e., demand) is required to move a stock with 400 million shares outstanding. However, only a moderate amount of buying is required to propel a stock with only four to five million shares outstanding (particularly if a large amount is held by corporate insiders).
Although there is never a “satisfaction guaranteed” label attached to a stock, O’Neil found that you could significantly increase your chances of a profitable investment if you purchase a leading stock in a leading industry.
He also found that winning stocks are usually outperforming the majority of stocks in the overall market as well.
Institutional Sponsorship The biggest source of supply and demand comes frominstitutional buyers (e.g., mutual funds, banks, insurance companies, etc). A stock does not require a large number of institutional sponsors, but institutional sponsors certainly give the stock a vote of approval. As a rule of thumb, O’Neil looks for stocks that have at least 3 to 10 institutional sponsors with better-than-average performance records.
However, too much sponsorship can be harmful. Once a stock has become “institutionalized” it may be too late. If 70 to 80 percent of a stock’s outstanding shares are owned by institutions, the well may have run dry. The result of excessive institutional ownership can translate into excessive selling if bad news strikes.
O’Neil feels the ideal time to purchase a stock is when it has just become discovered by several quality institutional sponsors, but before it becomes so popular that it appears on every institution’s hot list.
Market Direction
This is the most important element in the formula. Even the best stocks can lose money if the general market goes into a slump. Approximately seventy-five percent of all stocks move with the general market. This means that you can pick stocks that meet all the other criteria perfectly, yet if you fail to determine the direction of the general market, your stocks will probably perform poorly.
Market indicators are designed to help you determine the conditions of the overall market. O’Neil says, “Learn to interpret a daily price and volume chart of the market averages. If you do, you can’t get too far off the track. You really won’t need much else unless you want to argue with the trend of the
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Wednesday, January 6, 2010

Rate of Change (ROC)

Rate of Change (ROC)
The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a pure momentum oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price “n” periods ago. The plot forms an oscillator that fluctuates above and below the zero line as the Rate-of-Change moves from positive to negative. As a momentum oscillator, ROC signals include centerline crossovers, divergences and overbought-oversold readings. Divergences fail to foreshadow reversals more often than not so this article will forgo a discussion on divergences. Even though centerline crossovers are prone to whipsaw, especially short-term, these crossovers can be used to identify the overall trend. Identifying overbought or oversold extremes comes natural to the Rate-of-Change oscillator.
ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100

Tuesday, January 5, 2010

ELLIOT WAVE _ Guidelines of Wave Formation

Angle of trend is sharper than the sideways trend of combinations, double and triple zigzags can be characterized as non-horizontal combinations, as Elliott seemed to suggest in Nature’s Law. However, double and triple threes are different from double and triple zigzags, not only in their angle but in their goal. In a double or triple zigzag, the first zigzag is rarely large enough to constitute an adequate price correction of the preceding wave. The doubling or tripling of the initial form is typically necessary to create an adequately sized price  retracement. In a combination, however, the first simple pattern often constitutes an adequate price correction. The doubling or tripling appears to occur mainly to extend the duration of the corrective process after price targets have been substantially met. Sometimes additional time is needed to reach a channel line or achieve a stronger kinship with the other correction in an impulse wave. As the consolidation continues, the attendant psychology and fundamentals extend their trends accordingly.
As this section makes clear, there is a qualitative difference between the number series 3 + 4 + 4 + 4, etc., and the series 5 + 4 + 4 + 4, etc. Notice that while impulse waves have a total count of 5, with extensions leading to 9, 13 or 17 waves, and so on, corrective waves have a count of 3, with combinations leading to 7 or 11 waves, and so on. Triangles appear to be an exception, although they can be counted as one would a triple three, totaling 11 waves. Thus, if an internal count is unclear, the analyst can sometimes reach a reasonable conclusion merely by counting waves. A count of 9, 13 or 17 with few overlaps, for instance, is likely motive, while a count of 7, 11 or 15 with numerous overlaps is likely corrective. The main exceptions are diagonal triangles of both types, which are hybrids of motive and corrective forces.
Orthodox Tops and Bottoms
Sometimes a pattern’s end differs from the associated price extreme. In such cases, the end of the pattern is called the “orthodox” top or bottom in order to differentiate it from the actual price high or low that occurs intra-pattern. For example, in Figure 1-11, the end of wave 5 is the orthodox top despite the fact that wave 3 registered a higher price. In Figure 1-12, the end of wave 5 is the orthodox bottom. In Figures 1-33 and 1-34, the starting point of wave A is the orthodox top of the preceding bull market despite the higher high of wave B. In Figure 1-47, the end of wave Y is the orthodox bottom of the bear market even though the price low occurs at the end of wave W.
Fig 12

Fig 1.47

Fig 1.33
This concept is important primarily because a successful analysis always depends upon a proper labeling of the patterns. Assuming falsely that a particular price extreme is the correct starting point for wave labeling can throw analysis off for some time, while being aware of the requirements of wave form will keep you on track. Further, when applying the forecasting concepts that will be introduced in Lessons 20 through 25, the length and duration of a wave are typically determined by measuring from and projecting orthodox ending points.
Fig 1.11
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Monday, January 4, 2010


A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C. The sub wave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A, as illustrated in Figures 1 and 2.

In a bear market, a zigzag correction takes place in the opposite direction, as shown in Figures 3 and 4. For this reason, a zigzag in a bear market is often referred to as an inverted zigzag.
Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening “three,” producing what is called a double zigzag (see Figure 6) or triple zigzag. These formations are analogous to the extension of an impulse wave but are less common.
The correction in the Standard and Poor’s 500 stock index from
January 1977 to March 1978 (see Figure 7) can be labeled as a double zigzag, as can the correction in the Dow from July to October 1975 (see Figure 8). Within impulses, second waves frequently sport zigzags, while fourth waves rarely do.
R.N. Elliott’s original labeling of double and triple zigzags and double and triple threes (see later section) was a quick shorthand. He denoted the intervening movements as wave X, so that double corrections were labeled A-B-C-X-A-B-C. Unfortunately, this notation improperly indicated the degree of the actionary sub waves of each simple pattern. They were labeled as being only one degree less than the entire correction when in fact, they are two degrees smaller. We have eliminated this problem by introducing a useful notational device: labeling the successive actionary components of double and triple corrections as waves W, Y, and Z, so that the entire pattern is counted “W-X-Y (-X-Z).” The letter “W” now denotes the first corrective pattern in a double or triple correction, Y the second, and Z the third of a triple. Each subwave thereof (A, B or C, as well as D or E of a triangle — see later section) is now properly seen as two degrees smaller than the entire correction. Each wave X is a reactionary wave and thus always a corrective wave, typically another zigzag.
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