Momentum Indicators 5-9-09.doc

7/27/2019 Momentum Indicators 5-9-09.doc

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BANKINGPERCENT CHANGE FOR WEEK

$BKX 36%

GS 9.5%

MS 7.5%

BAC 59%

C 31%

WFC 38%

JPM 18%

REGIONALS (RKH) 25%


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COMMODITIESPERCENT CHANGE FOR WEEK

GLD 2.8%

SLV 11.2%

USO 8.5%

OIH 8.6%

XLE 8.5%


3/18

The McMillan Weekly 5.08.09Our indicators continue to remain bullish, although some are seriously overbought. The broad market rally seems to show little sign ofslowing down, even though it has reached a rather frothy level, with $2.00 stocks bounding higher all over the board.

$SPX broke out over resistance at the 875-880 level this week. Having accomplished that, the next areas of resistance are theJanuary highs at 940 and then the highs of last October at 1000. Today, $SPX reached the 930 level before falling back sharply in anoverbought correction. So, for now, the 930-940 area represents overhead resistance. On the downside, the 875-880 area shouldnow represent support, as does the 20-day moving average (currently near 870).


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The equity-only put-call ratios had been fooling around with sell signals last week, but now they have broken down to new lows. Thatreconfirms buy signals for these indicators. They are overbought by the fact that they are low on their charts, but as long as theycontinue to decline, they remain on intermediate-term buy signals.


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Market breadth has been extremely strong and is overbought. That is actually bullish, for it means that the advance is broad-based.This overbought condition has persisted for quite a while, and generally that indicates that the current rally is just the beginning of alarger intermediate-term move.

Volatility indices ($VIX and $VXO) remain in downtrends. That, too, is bullish for the broad market. $VIX would have to climb above37 to jeopardize the current downtrend.


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In summary, the situation remains bullish. The overbought nature of breadth and the put-call ratios indicates that sharp, but short-lived corrections are possible. But the intermediate-term trend is still upward.

Please note: All RED Option Advisory emails are price sensitive. Therefore, all recommendations, unless otherwise noted, areapplicable for 'DAY' orders only, not good-till-cancelled. If a recommendation cannot be filled, we may choose to resend the email thefollowing day along with any modifications.

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Only when the tide goes out do you discover who's been swimmingnaked.Warren Buffett

Volume-Related Momentum Indicators

On-Balance Volume (OBV)

Accumulation/Distribution Line

Chaikin Money Flow Oscillator
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What Does On-Balance Volume (OBV) Mean?

OBV attempts to detect when a stock is being accumulated by a large number ofbuyers or sold by many sellers. Traders will use an upward sloping OBV to confirman uptrend, while a downward sloping OBV is used to confirm a downtrend. Findinga downward sloping OBV while the price of an asset is trending upward can beused to suggest that the "smart" traders are starting to exit their positions and that ashift in trend may be coming.In developing theAccumulation/DistributionLine, Chaikin took a different approach. OBV uses the change in closing pricefrom one period to the next to value the volume as positive or negative. Even if a stock opened on the low and closed onthe high, the period's OBV value would be negative as long as the close was lower than the previous period's close.Chaikin chose to ignore the change from one period to the next and instead focused on the price action for a given period(day, week, month). He derived a formula to calculate a value based on the location of the close, relative to the range forthe period. We will call this value the "Close Location Value" or CLV. The CLV ranges from plus one to minus one with the

center point at zero. There are basically five combinations:

( ( (C - L) - (H - C) ) / (H - L) ) = CLV1. If the stock closes on the high, the top of the range, then the value would be plus one.2. If the stock closes above the midpoint of the high-low range, but below the high, then the value would be between

zero and one.3. If the stock closes exactly halfway between the high and the low, then the value would be zero.4. If the stock closes below the midpoint of the high-low range, but above the low, then the value would be negative.5. If the stock closes on the low, the absolute bottom of the range, then the value would be minus one.

The CLV is then multiplied by the corresponding period's volume, and the cumulative total forms the

Accumulation/DistributionLine.


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The OBV line is a running cumulative total of the daily volume numbers,

adding volume on days the price goes up, subtracting on down-days.

Calculation:OBV = OBV (yesterday) + Volume (today)


10/18


One drawback of OBV is that even if a stock gapped down at opening and closedon the high of the day, the period's OBV value would be negative as long as theclose was lower than the previous period's close.

In developing theAccumulation/DistributionLine, Chaikin took a different approach.Chaikin chose to ignore the change from one period to the next and insteadfocused on the price action for a given period (day, week, month). He derived aformula to calculate a value between -1 and +1 based on the location of the close,relative to the range for the period and called this value the "Close Location Value"or CLV.

If the stock closes on the high, the top of the range, then the value would beplus one.

If the stock closes exactly halfway between the high and the low, then thevalue would be zero.

If the stock closes on the low, the absolute bottom of the range, then the valuewould be minus one.

For those who really want the formula: ( ( (C - L) - (H - C) ) / (H - L) ) = CLV

The CLV is then multiplied by the corresponding period's volume, and thecumulative total forms theAccumulation/DistributionLine.


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The basic premise behind the Accumulation Distribution Line(AD) is that the degree of buying or selling pressurecan be determined by the location of the Close relative to the High and Low for the corresponding period (CLV).The signals for the Accumulation/DistributionLine are fairly straightforward and center around the concepts ofdivergence and confirmation.

On the chart forAlcoa, Inc. (AA) , the Accumulation/DistributionLine formed a huge positive divergence thatwas over 4 months in the making. Even though the stock fell from above 35 to below 30, theAccumulation/DistributionLine continued on a relentless march north. If one did not know better, it would seemthat the two plots did not belong together. However, the stock finally caught up with theAccumulation/DistributionLine when it broke resistance in November.

Another means of using the Accumulation/DistributionLine is to confirm the strength or sustainability behind anadvance. In a healthy advance, the Accumulation/DistributionLine should keep up or, at the very least, move in
http://stockcharts.com/h-sc/ui?s=aahttp://stockcharts.com/h-sc/ui?s=aahttp://stockcharts.com/h-sc/ui?s=aa


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an uptrend. If the stock is moving up at a rapid clip, but the Accumulation/DistributionLine has trouble makinghigher highs or trades sideways, it should serve as an indication that buying pressure is relatively weak.

WMT began a sharp advance in August that was accompanied by an equally strong move in theAccumulation/DistributionLine. In fact, the Accumulation/DistributionLine was stronger than the stock in early

September. After a bit of a consolidation, both again started higher and recorded new reaction highs in earlyOctober. Volume flows were behind this advance from the very beginning and continued throughout. The stockended up advancing from 40 to 60 in about 3 months.


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Chaikin Money Flow Oscillator

A further refinement for smoothing is Chaikin Money Flow, which is anaveraging of the Accumulation/Distribution Values for typically 21 days (or

periods).The 21-day Chaikin MoneyFlow is a good representation of the buyingand selling pressure for the past month.There are two factors that determine if a security is under accumulation vsdistribution.

positive values indicate accumulation and the higher the better

duration of time above zero

Summary:

All of these indicators are volume-weighted. Their purpose should be toconfirm price movement by looking for sustainability, strength, anddivergences.


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Momentum Indicators 5-9-09.doc