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ON-BALANCE VOLUME'S DERIVATION
Editor,
I appreciate the mention of my accumulation/distribution work in your September 2000 article by Carl Ehrlich ("Using Oscillators With On-Balance Volume"). While Joe Granville certainly popularized the idea of on-balance volume, the first reference to this technique, the name of the technique itself, and the actual adding and subtracting of each day's volume was done in a course by two gentlemen named Woods and Vignolia in the late 1940s. They also had an advisory letter where they showed examples. David Bostian also added onto the concept with his work done in 1966-67.
Larry WilliamsThanks for setting the record straight. We achieve progress by building on the past, and it's important to give credit where it is due.-- Editor
SIMPLY FANTASTIC
Editor,
I'm a new S&C subscriber. It's simply fantastic: the articles are clear and involving. Illustrations are funny and useful. The oversize charts really help me to understand technical analysis of stocks and commodities. Your charts are better than a thousand words.
Luca Petricca
Rome, Italy
Grazie! -- Editor
NOTE FROM DOWN UNDER
Editor,
Thanks for a great publication. Here in Australia, we have to wait a few months for the mag to hit the newsstands, but it's worth the wait!
Peter J.L. Dyke, via E-mail
STOCHASTIC POP ENHANCEMENT USING RSI
Editor,
I was fooling around with the concepts from David Steckler's article on stochastic pops ("Trading Stochastic Pops," S&C, August 2000) and I believe I noticed another phenomenon that seemed to support the possibility of the pop occurring.
What I noticed was stocks with an Rsi between 45 or 50 and 80 and generally rising had a tendency to stay in the upper "oversold" stochastic pop regime. The typical 14-day or nine-day RSI seemed to work to evaluate the pop. I think the nine-day was a tad better, since it's a bit more responsive. In addition, if each successive trough of the stochastic was higher than the last, it seemed to indicate that a pop was forthcoming.
I suppose this is sort of an extension to the rule regarding a rising weekly stochastic, since the stochastic and RSI work off of similar momentum principles. I thought the trading community might want to try to enhance the stochastic system with this tidbit. I did not extensively backtest or check these occurrences but have merely observed it on a number of my stock picks lately that have, thankfully, been popping. A few tickers to check are ACLNF (late July to early August), AMK (April), DGX (in April and from June to July), COCO (June to July).
Keep up the excellent articles!
Bill Cooke, via E-mail
PUT/CALL OSCILLATOR
Editor,
I found the August 2000 article on the put/call ratio oscillator by John Summa ("A Put/Call Ratio Oscillator To Pinpoint Market Conditions") most enlightening. However, in it, the author states, "The daily total equity put/call ratio is simply the total put volume divided by the total call volume on all options exchanges."
Could the author verify as to where he collects this data from "all options exchanges" or what symbols he is referencing? Or is the author calculating these values himself from his own data collection?
He also mentions the CBOE volume information, which can be referenced from the author's Website. Is there any symbol for this, since I cannot find one for that either, or do I have to manually type in these values each day (which is a chore and doesn't allow me to back-reference the results very easily)?
Andrew Tinton
Den Haag, HollandJohn Summa replies:
In the article I am referring to total equity call and put volume, and the data is available for collection from The Wall Street Journal (daily) or Barron's (weekly). The data I used was purchased from McMillan Analysis (www.optionstrategist.com), which has a service offering put/call ratios on commodities and select stocks. A good proxy dataset is the CBOE's (www.cboe.com) market statistics, which has equity put and call volumes on a daily basis, which can be assembled manually using their archived datafiles. There are a number of services that sell the equity put and call volume data, one of which is Csi, in its Unfair Advantage package. It provides charting ability as well as historical files on all the major commodity markets, not just equity-only put and call volume.
Regarding a symbol for CBOE volume information: there isn't any symbol. The CBOE data is available at https://www.cboe.com/tools/statistics/summeriz.asp, but it is a chore to construct the series from scratch. It's easier and more reliable to purchase the data from McMillan Analysis or from CSI at https://www.csidata.com/index.html.
CHAIKIN MONEY FLOW
Editor,
I have been looking for a pure money flow indicator, so I bought a copy of the August 2000 S&C to learn about Chaikin's money flow indicator ("Chaikin's Money Flow" by Christopher Narcouzi). I read the article and began my search. I bought some puts, and unfortunately, the stock continued to make new highs. As I have conducted more research, I have found that Chaikin's money flow is barely related to true money flow.
A true money flow indicator multiplies the number of shares by the price in each trade. It then gives the volume "credit" to either positive or negative money flow. It is positive if the price it traded at was on an uptick. If the price was on a downtick, it gives credit to the negative money flow. At the end of the day, you figure out which was bigger, positive or negative money flow, and that is your number for whether money flowed into or out of your stock that day.
Chaikin's money flow uses numbers from closing. That doesn't give you the accuracy needed. It's possible that a stock could actually close lower than the previous day and money still flowed into a stock. Money flow should indicate whether people are interested in a stock that is moving up. The Chaikin money flow indicator isn't worthless, but it sure doesn't have the accuracy of the method I just described.
I have found very few charts that display a divergence and that give a buy/sell signal. I'm writing not to complain but to alert traders not familiar with money flow (like me) to the rather deceiving name of this indicator. How about calling it the Chaikin volume price evaluator (CVPE)? Could you point us traders in the direction of a free Website that gives true money flow indicators? Thanks for the other good articles in that issue.
Bill Ross, via E-mail
Lazlo Birinyi, Martin Pring, Marc Chaikin and others have put forth techniques for measuring money flow. Each technique has its uses. The similarly named indicators can indeed cause confusion, but in technical analysis, techniques have been developed over the years by many different people. Unfortunately, the names of these techniques aren't always unique or apt, and changing the name of a long-standing indicator isn't easy to do, generally speaking, especially once it starts making its way into software packages.Chaikin's money flow is often referred to as a money flow oscillator. Birinyi's money flow is usually referred to as a money flow indicator (MFI), which is the money flow indicator you're most likely to find in technical analysis software.
Here are some articles we've published in S&C over the years on money flow concepts:
Ehlers John F. [1993]. "Creating Indicators With Physics," Technical Analysis of STOCKS & COMMODITIES, Volume 11: October.
Trading volume multiplied by the change of price can be viewed as money flow into (for positive changes of price) or out of (negative changes for) the market. What's more, money flow has a theoretical predictive characteristic when the market is in a cycle mode.Goldstein, Steven B., and Michael N. Kahn [1988]. "Money Flow Analysis," Technical Analysis of STOCKS & COMMODITIES, Volume 6: February.
On-balance volume is a useful indicator but still lacks complete market sensitivity. For this reason, the concept of money flow was developed by Lazlo Birinyi at Salomon Brothers. Instead of using each day as a reference point, money flow analyzes each trade. And instead of ignoring the price or the amount the stock is up or down, money flow weights each trade by the price. Money flow, therefore, is a weighted average of the trades in a stock or group of stocks.Green, Brian D. [1994]. "On Trendlines, Money Flow Index, And The Elliott Wave," Technical Analysis of STOCKS & COMMODITIES, Volume 12: August. With sidebar, "The money flow index."
The money flow index (MFI) is a volume-weighted form of the relative strength index (RSI). MFI compares today's average price to yesterday's average price and then weighs the average price by volume to calculate money flow (MF). The ratio of the summed positive and negative money flows are then normalized to be on a scale of zero to 100. Sidebar builds a 14-period MFI.Hartle, Thom [1993]. "The Critical Eye Of Laszlo Birinyi," interview, Technical Analysis of STOCKS & COMMODITIES, Volume 11: February. With sidebar, "Money flow indicator (MFI)."
The money flow indicator is based on the concept that large-volume single trades are much more important than smaller-share trades.Hartle, Thom [1994]. "Chatting With Marc Chaikin," interview, Technical Analysis of STOCKS & COMMODITIES, Volume 12: January. With sidebar, "Chaikin indicators."
Keeping track of money flow is crucial. "I developed the money flow indicator, which is the 21-day sum of the raw daily accumulation/distribution indicator divided by the 21-day sum of volume. Instead of calculating a running total, we are looking at an oscillator of money flow." Sidebar includes MetaStock and TradeStation formulas.Hartle, Thom [1994]. "Trading A Stock Using Technical Analysis," Technical Analysis of STOCKS & COMMODITIES, Volume 12: July.
The basic concept of the Chaikin money flow indicator is that strong markets will have the closing price in the upper portion of the day's trading range and the volume will be higher on up days.Pring, Martin [1997]. "The Pring Money Flow Indicator," Technical Analysis of STOCKS & COMMODITIES, Volume 15: May.
Here's a technique to compare the yield on three-month commercial paper to the Standard & Poor's 500, creating an indicator for the stock market.Quong, Gene, and Avrum Soudack [1989]. "Volume-Weighted RSI: Money Flow," Technical Analysis of STOCKS & COMMODITIES, Volume 7: March.
In an effort to improve the RSI, we have devised a short-term technical indicator called money flow index. This indicator attempts to measure the strength of money entering and leaving the market. When today's average price is greater than yesterday's average price, then it is an up or positive day for money flow.
OFFSHORE BROKERAGES
Editor,
In your July 2000 issue, which contained a list of brokerages ("Traders' Resource: Brokerages"), BBL of the Bahamas was listed as a broker through which to place trades in stocks and futures. I was wondering if you had any information about offshore brokers in general. Specifically, is my deposit safe with an offshore broker, since these are not governed by US regulations?
Gerry Canady, via E-mailTry visiting the SEC's Website for advice on this topic. Unfortunately, we can't give advice about brokers. -- Editor
TALEB INTERVIEW
Editor,
Superb interview with Nassim N. Taleb. As we stress in Option Wizard Trading Method, though there may be just one bullet in the six chambers of the revolver, and a low probability the Russian roulette enthusiast will receive it, that one bullet is very real, and very lethal! Low probability means seldom, not never.
Keep up the excellent work.
John A. Sarkett
Option Wizard
ADAPTIVE TRENDS AND OSCILLATORS
Editor,
Thank you very much for John Ehlers's May 2000 article, "Adaptive Trends and Oscillators," an article I found most informative and one in which Ehlers displays (once again) his unique and pioneering approach to technical analysis.
As a MetaStock user, I downloaded the codes for the sinewave indicator and the instantaneous trendline from Equis International's Website (Equis.com) but found that the results were somewhat confusing. First, on the graph of the sinewave indicator, there are two plots, both of the same color and title. I cannot change the color or properties of one of them without having the changes appearing on the other. Furthermore, the two plots appear meaningless.
Second, the formula for the instantaneous trendline indicator also plots two lines, one of which I presume is the actual indicator and the other which traces out the price plot, although I'm not sure of the relation between this and the price plot.
Could you shed some light as to what my problem may be? It would be a shame not to be able to use these new and promising tools that analysts such as Ehlers invent.
I look forward to receiving the next issue of S&C.
Dimitri Daskalakis
Crete, GreecePlease contact Equis International about MetaStock code. -- Editor
INSTANTANEOUS TRENDLINE AND SINEWAVE INDICATOR CODE
Editor,
I think you had better compare the charts produced by TradeStation2000i and MetaStock 6.52 for the Ehlers instantaneous trendline and sinewave indicator (discussed in the May 2000 S&C). The published MetaStock code doesn't match the TradeStation output. I think John Ehlers does such excellent work and I would hate to see people discounting his work just because of a little bad code.
Phill Parkerville
AustraliaAgain, please contact Equis International regarding MetaStock code. -- Editor
ERRATA: STOCHASTIC POP
Editor,
I wanted to correct a statement I made in my August 2000 S&C article, "Trading Stochastic Pops." The stochastic indicator was developed by George Lane, not J. Welles Wilder, as I had stated in the article.
Thank you.Dave Steckler
ERRATA: TRADERS' RESOURCE
Floyd Upperman & Associates (also known as Commodity Trading Advisory Services Floyd Upperman), a registered advisory, was inadvertently left out of the Traders' Resource advisories and consultants categories.
In addition, in the October 2000 Traders' Resource category of Consultants, we incorrectly listed the "Top 10" consultants viewed most often at the Traders' Resource Website. It should have read:
TOP 10 CONSULTANTS
1. Elliott Wave Institute
2. WinningDayTraders
3. Sunny Harris & Associates, Inc.
4. Inductive Solutions, Inc.
5. Daytraders Bulletin
6. Compute-Assist, Inc.
7. Biotech Advisor
8. Ruth Barrons Roosevelt
9. Cybernetic Trading Co.
10. TradeStorm, Inc.These are the 10 consulting services viewed most often on the Traders' Resource Website.
ERRATA: SALOMON SMITH BARNEY
In the October 2000 article "Strength Figure" by Alex Saitta, we misstated the name of the firm for which Saitta serves as analyst and vice president. It should have read Salomon Smith Barney.
ERRATA: ADX SIDEBAR
First, let me say I'm a big fan of STOCKS & COMMODITIES and hope you will continue to provide Excel examples. Although I also use other trading/data software, sometimes I work through some things in Excel to get a better understanding of how the indicator works.
In the sidebar on calculating the average directional movement indicator (ADX) on page 33 of the August 2000 S&C, I entered the formula you gave for H16 and H17:
H16 is: =SUMa(E3:E16) H17 is: = Round((TRUNC((H16-(H16/14)+E17),3),2)But I got an error message when I did so. I also tried to enter the similar formula for I17 and got the same error.
I then entered the data from your S&P 500 example in the sidebar. It appears that a closed parenthesis is missing after the "3" in the formula for cell H17 (57.52). However, when I entered the formula as
=Round((TRUNC((H16-(H16/14)+E17),3)),2)I got the correct answer, so I guess this is the problem. If it's something else, please let me know.
Thanks and keep up the great work.
Randy Cantrell, via E-mailYou are correct about the errors in the sidebar. If fact, upon reviewing the sidebar, I discovered other errors in the code too. Please see pages 119-120 of this issue for the corrected sidebar on ADX. We sincerely regret the problems. -- Editor