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Wiser Trader Stocks and Options Newsletter ______________________________________________________________________________
Issue No. 75 May 1, 2006 Prescott, Arizona Systems@WiserTrader.com ______________________________________________________________________________
1.0 Trading
Some may not have been surprised last week to learn how seldom the market moves in the same direction from day-today. Average market momentum crosses the Williams %R neutral level most often when the ratio of a 5-index indicator to its range is between 1 and 2.
1.1 Momentum Changes
Last week a 5-index momentum indicator was defined as the average Williams %R for the DOW, NASDAQ, S&P 500, NYSE and Russell 2000. Over the period from January 2004 to the present, the indicator changed direction from day-to-day about 68% of the time. The percentage of time that the market moved in the same direction on consecutive days is summarized in Table 1.
Table 1
The range is defined as the difference between the maximum and minimum Williams %R values for the five indices. The range is inversely related to the intensity of market momentum. When the range is narrow, market momentum is more directed. Such directed momentum allows the market to rise with a higher advance-decline ratio or fall with a lower advance-decline ratio. This “directivity” can be quantified and will be discussed in a later issue.
Last week a symmetrical plot of the 5-index indicator versus the range similar to Figure 1 was shown without connections between data points and without construction lines. This data was taken from January 5, 2004 to April 14, 2006. Whereas last week we looked at day-to-day changes in direction, this week we can explore what this kind of chart can tell us about general market behavior.
FIGURE 1
Although the magnitude of the range is a positive value, there is a benefit of symmetry in representing it as a negative value in a Cartesian coordinate system. Let us begin a discussion of crossing the -50 Williams %R neutral level by pointing to the green diagonal construction lines radiating from the origin at the upper right. The positive slopes of these green lines represent ratios of indicator to range (DI/DR) with values from 0.25 to 5. In a falling market, the data is bracketed by the red construction lines radiating from the lower right corner, having slopes of -0.25 to -5. Due to symmetry, data points in the upper and lower half of the chart behave the same way regarding the respective green and red construction lines.
Pairs of adjacent red and green construction lines form three shaded quadrilateral areas. Due to symmetry, we can refer to each region by simply using the magnitudes of the slopes of the bracketing lines, without regard to their algebraic signs.
By far the largest number of -50 crossings occurs in the middle region bounded by DI/DR ratio magnitudes from 1 to 2. From January 4, 2004 to the present, about 52% of neutral crossings occur by passing through this region.
The region on the left, bracketed by DI/DR ratio magnitudes from 0.5 to 1 has about a quarter of all crossings. This region involves wide values of range and often results in the indicator snapping back, to reverse its recent movement.
The region on the right, bracketed by DI/DR ratio magnitudes from 2 to 5 also has about a quarter of crossings. This region involves narrow values of range accompanied by extremely large and sudden movements across the -50 neutral level.
In view of the symmetrical geometry of the chart, I trust that it is seen as a geometrical requirement that the indicator can not cross the -50 neutral line in either direction unless the magnitude of DI/DR is greater than 0.5.
Historically, one can see that, except for brief excursions outside, all the data lies within in a region bounded by DI/DR ratios ranging from 0.25 to 5. The brief exceptions are met with the indicator snapping back, to reverse its recent movement. Historically, the indicator does not cross the -50 neutral line outside this range.
Recent intraday interplay between the indicator and range can be seen along with 3-month behavior in Figure 2 on an atypical day that had a great deal of movement. Intraday data was taken at 5-minute intervals. After more testing, this Excel chart will be made available as a free download, most likely a part of the “Index Momentum” Excel file that is currently available.
FIGURE 2
2.0 Market Analysis
This week the market moved sideways. There is much disagreement regarding future inflation. Earnings have been good overall and economic data has been strong. However, the May-October period is not known for market gains.
Key industry ETF’s in Table 2A are Biotech and Semiconductors, which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Housing are respective indicators for the inverse health of the currency (inflation) and the capacity for consumer spending.
Table 2A Indices, Key Industry ETF’s and Sector SPDR’s
The VIX and VXN volatility indexes are listed in Table 2B.
Table 2B Volatility
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Table 2C
Market Summary
Industries are listed according to the Dow Jones Classification System