USING THE CHAIKEN A_D OSCILLATOR By DARYL GUPPY

This is a market about momentum. – finding it and setting stops. We have been looking at momentum stocks and exploring the relationship between volume and price activity. The key observation with these stocks is that price increases dramatically on high volume and that the price retreats are accompanies by much lower volume. The change in this mirror activity where a fall in price is matched by higher volume suggests a weakness in the trend. This relationship between price and volume can also be explored with a Chaiken Oscillator. This oscillator is built around three assumptions.

• The first is that if a stock closes above its median value for the day, then the stock is being accumulated. The closer the stock closes to its high for the day, the more accumulation takes place. Accumulation means, that buyers are confident that the price is likely to continue to increase.

• The second assumption, is that a healthy rise in price is not only matched with a rise in volume but that that volume also shows accumulation taking place. When volume lags behind price rallies, it shows that less buying power is available to move the stock price higher. This makes for a weaker trend.

• The third basis for the Chaiken Oscillator, is that you can monitor the flow of volume into and out of the market on a comparative basis. Essentially this is done by using two moving averages, 3 day and 10 day, comparing volume changes with changes in the advance or decline of price in relation to the median price for each day.

The oscillator comes with two rules.

• The first is the standard oscillator rule that has traders looking for a divergence between new price peaks and oscillator peaks. Personal observation suggests that this rule is not particularly useful in Australian markets.

• The second rule, is to use the change in the direction of the oscillator as a buy or sell signal. If the oscillator moves up above the zero reference line then a buy signal is generated. This is only acted on if the stock is already in an up trend. The up trend is defined traditionally by a 90 day moving average. This is probably a bit slow, leaving too much room is current volatile markets. We find the 30 day moving average to be a more useful indication of the up trend.

If we apply the Chaiken Oscillator to SEN, we see that it confirms the relationships we noted in previous weeks. First SEN is above the 30 day moving average. This sets the trader up for acting on entry signals above the zero reference line because the trend is up. At point A the Chaiken Oscillator moves above zero just prior the major increase in volume that is an initiating signal that we looked at in previous newsletters. We see the same relationship at B, C and more recently at D. When the value moves above the zero reference line and when it is accompanied by an increase in volume, then a buy signal has been indicated.



What this is allowing the trader to do, is to buy the retracements or pullbacks in a trend with a greater level of confidence. When the SEN price falls from its high of $0.70 and makes a low around $0.60, then the Chaiken Oscillator allows the trader to see this price retreat in the context of a continuing trend. This is always a trader’s dilemma. We want to buy into strong trends but we want to get a bargain price. When the bargain price turns up, were not very confident about buying it because we are worried that the trend might have changed and really be starting to go down. The Chaiken Oscillator is a tool traders can use to confirm the strength of the trend and the validity of these cheaper entry points.

The Chaiken Oscillator is not a stand alone indicator. It is most usefully applied as a confirmation for relationships identified initially by other indicators. In momentum stocks these Chaiken relationships are strong and generate few whipsaws. This is less evident in stocks where volume is less erratic.

The Chaiken Oscillator in Metastock is a standard default formula and appears to be calculated on a different basis to that of Trade Station. In the Trade Station version the plot is inverted and also appears to be less sensitive. In using more complex indicators, it is important to be able to get behind the indicator construction to ensure that its implementation is the same as the author originally intended. The manual should provide this background information.


To read more articles and commentaries from Daryl Guppy, click HERE

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

TRADING/INVESTMENT STRATEGY AND TACTICS

Strategy is understanding the season. Tactics are deciding if we need to take an umbrella today or if we should put on sunscreen. Often strategy and tactics are in agreement – using an umbrella in Autumn. Sometimes they are less compatible which is why people in Autumn are also prepared for quite warm days. The market condition is similar. The strategy messages are sounding caution, but tactically there are many opportunities. Part of this confusion comes from the difference between a rally and a trend.

But first, here is a chart that continues to frighten us. The first is the DOW performance during 1929-30. It shows the fast rally rebound that lifted the market 48% before dumping it again into the collapse of 1930 and 1931. The market also rose again with rallies of between 23% and 35% on several occasions in 1930 and 1931. Great trading, but shocking investment opportunities. This type of situation remains a possibility even in these apparently ebullient times where many public figures are pronouncing the end of the recession. These are in many cases the same figures who were unable to identify the start of the recession.




The second and third chart highlight the difference between a rally and a trend. We are accustomed to thinking of a rally as a short lived up move. Time is a factor in separating a rally from a trend, but it is not the most important factor. The difference between a rally and a trend is the way the trend tests and retests a rising support line, or trend line. A trend has a pattern of rally, retreat, rebound, rally and retest of the trend line. This is shown in Chart A which is the Hang Seng index. The April retreat is a significant ‘stress test’ of the trend and it finds support at the lower edge of a long term consolidation support and resistance area that has been developing since September 2008.



There are two other important supporting features. The first is the consolidation pattern of sideways trading in a band over several months from October through to March. This provides a foundation for the trend breakout.

The second is the character of the retreat and rebound. The rebound develops from the upper edge of the long term GMMA. Additionally, as this retreat develops there is no compression in the long term GMMA. The market absorbs this retreat. Investors step in as buyers because they believe this retreat is an opportunity to join the rising trend. The width of the long term GMMA shows investors support for the trend.

Rally behaviour is different. A rally has a single trend line that has not experienced any significant rally and retreat behaviour. This is chart B, the DOW. It is difficult to place an accurate trend line on the DOW chart. The trend line that most correctly defines the behaviour is shown. Note the key difference. There is no rally, retreat and rebound behaviour in this period. It is simply a series of minor tests of the support function of the trend line. This behaviour underlines the rally characteristics of the DOW.



So here is the nasty question. If a trend includes a rally, retreat and rebound then where is the rebound point for the DOW when the current rally collapses? In this ‘stress test’ where is the bottom lime located? There is weak support near 7500 based on the spike lows in November. Or there is support near 6500 from the March 2009 lows.

The separation in the long term GMMA is narrow. This shows there is not strong support from investors. This narrow band also provides every weak support for any market retreat. Unlike the Hang Seng there is a low probability investors will step into the market and buy as the index falls. There is a higher probability they will join the selling and accelerate the continuation of the downtrend.

Fear and caution should not blind us to the opportunity to identify good trading opportunities. There are excellent returns available from rally and prolonged rally behaviour in individual stocks. However, the strategic outlook suggests it is too early to treat these as investment opportunities. We trade for profit and act with caution.

To read more articles and commentaries from Daryl Guppy, click HERE

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

GOLD Price Support

The gold price shown on the New York Mercantile Exchange Gold chart has unusual behavior. The price behavior is dominated by strong trends which are interrupted by strong support and resistance levels. There are four important support and resistance levels. The lowest of these is located near $790.00. This is not a well defined support level so it is more effective to consider this as a support area.

The next support level is near $885.00. This is well defined and has been tested and retested.
The next support resistance level is near $925.00. This was a strong resistance level in 2008, September and October.

The highest resistance level is near $1000.00 This is an important psychological level. When the American market collapsed in 2008 January this was the peak area for the gold price. The retest of the $1000.00 level again in recent weeks indicates there are significant problems with the American economy.

Support and resistance analysis suggests the retreat in the gold price will find good support between $885.00 and $925.00. There is a high probability of a rebound from this area and a retest of resistance near $1,000. A successful breakout above $1000,00 has a first target near $1,075 and a second target near $1,115. The long term breakout target is near $1,210.

The recent retreat from near $1,000.00 found a support level provided by the uptrend line which started in 2008, November. The retreat has broken the up trend line and normally this is a signal for a new downtrend to develop. A new short term downtrend line starts with the high point on 2009, February 20,. It touches the high point on 2009, March 13. The value of this trend line is now near $911.00.

Three features show a continuation of an uptrend rebound. They are:

• A close above the value of the short term downtrend line near $911.00.
• A move above the longer term uptrend line. Current value is near $915.00.
• A move above the resistance level near $925.00

The first target for a successful breakout above $925.00 is resistance at $1,000.00. A fall below support near $885.00 is bearish. The next strong support level is $790.00. The short term downtrend line crosses the $885.00 support level near the beginning of April. Traders will watch carefully for evidence of a bullish rebound or a continuation of the downtrend. Gold has a confused chart behavior so traders watch for price to move above or below the significant price levels before they take action.

To read more articles and commentaries from Daryl Guppy, click HERE

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.