Introduction

Market sentiment plays a critical role in assessing share price movements.

This article describes an indicator that I have developed which delivers a
consistent measurement of market sentiment using a unique
combination of indicators. I have called it the Trend Intensity Indicator.
The Trend Intensity Indicator combines and weighs four simple tools:
trend, volume,moving averages and price momentum. This generates
an invaluable benchmark that highlights only those stocks with
compelling trending qualities that offer the best prospects for
sustained price movement.
Why sentiment?
The motivation for designing an indicator evolved from a realisation
that fundamental analysis was not necessarily providing all the
answers, nor explaining many share price movements.
Price analysis is the examination of a companys share price. At any
one point in time buyers and sellers agree on a market price, which is
a direct reflection of market sentiment and drives the share price.
Fundamental and price analysis are two entirely separate moving
targets that very often diverge, but it is movement in the share price
which we are most interested in and from which we profit.
The sentiment factor can drive prices far from fundamental value.
The unexpected news of the 2002 profit downgrades were dealt with
so harshly by the market that it drove prices well below their
fundamental value. By contrast, future expectations can build prices to
unrealistic levels far beyond fundamental value. This is what made the
Biotech sector such a burial ground of shattered dreams so many
expectations. And of course, the Internet bubble was built almost
entirely on sentiment with little consideration for value at all.
Sentiment is a powerful force, and an understanding is essential to
successful stock market trading and investing. The difference between
a stocks fundamental valuation and its share price could be explained
as the sentiment factor.
How do we measure sentiment?
To initiate analysis using the Trend Intensity Indicator a definition of
trend is first established. A stock, which moves in a sequence of higher
highs and higher lows, is defined as having an uptrend. At the point
that this sequence begins, i.e. when it changes from a downtrend of
lower highs and lower lows,we consider the trend reversed.
Only weekly reversals are employed in our approach. The basis for
this rule is that a weekly trend change avoids daily market noise. It is
a reliable medium term indicator and provides a clear and objective
view of market sentiment.
Once a stock fulfils a simple trend definition, our Trend Intensity
Indicator then rates the power of that trend and establishes a clear
view of market sentiment towards it, or against it.
The Trend Intensity Indicator calculates a single value from a basket
of sentiment indicators.
1.Trend for direction
2. Price/volume investor participation/non participation
3.Moving average for averaging probabilities
4. Price momentum to define the power of the crowd behaviour
The calculation
By taking each indicator and breaking it down to the most basic
signals, we provide a value for the state each indicator is in. For trend,
it is either up or down which then receives a negative or positive
value reflecting that state. This is then weighted into the end result,
its Trend Intensity Rating.
Of the other three indicators we ask the question: Does volume
support the rise? Where is the price in relation to its moving average?
And is price movement attracting positive crowd behaviour?
The following table shows the indicators used for calculating the Trend
Intensity Indicator and their different states. The values and
calculations that generate the Trend Intensity Rating for each stock are
proprietary to Stockradar, however, the objective rule-based approach
becomes clear with only the most reliable signals being employed.
Trend Intensity Indicator
The Trend Intensity Indicator calculation generates a stock rating
between 10 and -10. The highest value of 10 reflects a consensus
agreement by all indicators that all positive sentiment rules have
been satisfied and the stock is, therefore, rated at a maximum on the
Trend Intensity scale. The lowest value of -10 reflects consensus
agreement from all indicators that no conditions have been met that
suggest a stock has any positive sentiment towards it.
A stock that reverses its trend to up and has a Trend Intensity Rating
of 4 or greater will qualify as a Stockradar Stock Pick and, as such, will
have compelling trending qualities and offer the best prospects of
price movement. Alternatively, a stock that reverses its trend and has
a Trend Intensity Rating of -4 or less will be disqualified from
Stockradars Stock Picks on the grounds that it has lost its trending
qualities. This breaks the market down into two distinct groups of
stocks. One that is trending, or one that is not. Our focus is on up
trending stocks only.
MARKET TECHNICIAN Issue 48 November 2003 10
The Trend Intensity Indicator
By Richard Lie
INDICATOR STATUS
PRICE
1a. Trend Up Higher Highs and Higher Lows
1b. Trend Down Lower Lows and Lower Highs
VOLUME
2a. Volume Bullish Volume Expanding & Price Rising
2b. Corrective in up trend Volume Contracting & Price Rising
2c. Volume Bearish Volume Expanding & Price Falling
2d. Corrective in down trend Volume Contracting & Price Falling
MOVING AVERAGE (XMA)
3a. Moving Average Positive Price > XMA
3b. Moving Average Negative Price < XMA
3c. Moving Average Neutral Prices closes once above/below XMA
MOVING AVERAGE CONVERGENCE
/DIVERGENCE INDICATOR (MACD)
4a. MACD Positive MACD lines > 0,
MACD Histogram Rising and > 0
4b. MACD lines > 0,
MACD Histogram Rising and < 0
4c. MACD lines > 0,
MACD Histogram Falling and > 0
4d. MACD lines > 0,
MACD Histogram Falling and < 0
4e. MACD Negative MACD lines < 0,
MACD Histogram Falling < 0
4f. MACD lines < 0,
MACD Histogram Falling > 0
4g. MACD lines < 0,
MACD Histogram Rising > 0
4h. MACD lines < 0,
MACD Histogram Rising < 0
Issue 48 November 2003 MARKET TECHNICIAN 11
TREND INTENSITY INDICATOR RATING SCALE
The Result
Stockradars coverage is of the ASX/300. Weekly results are presented
each Monday with our recommended Stock Picks at
Stockradar.com.au. Our weekly Stock Picks are supported by a Stock
Alert facility that scans the market daily, targeting stocks that are
moving in and out of their trends. Along with specific stock analysis,
the Weekly Sector Update takes on a thorough review of a market
sector. Published bi-monthly our free newsletter features a selection
of market highlights.
Richard Lie is an independent research provider licensed by the ASIC
(Australian Securities and Investments Commission).
An interesting article by Beverley Antrobus (MT August 2003), but
unfortunately a little flawed in the logic and also in some of the facts
quoted. Beverleys basic premise was that you cannot make more money
by actively trading a large move compared to the money you would make
by sitting tight for the long haul. This argument assumes that it is not
possible to identify intermediate turning points in advance and that you
have to wait for a change in trend before you act. This is not the case.
The concept that profit and loss is virtually random at the short term
level is incorrect. Markets are fractal, they are self similar and therefore
become predictable even at short time frames as well as over periods of
several years. I am also curious as to why Beverley uses W.D Gann as proof
that you should throw away your ticker and then describe the same
person as a self publicising failure.
Markets are not random and with hundreds of years of data thoroughly
tested do not appear to have ever been random. Why am I convinced that
the markets are fractal? Because using these fractal qualities, I can predict
future price movements every hour of every day in the same manner on
multiple time frames. Predicting these future price movements, including
definitive price levels in areas where no trading has existed before, is not
impossible as Beverley would have you believe. It is not easy but it is not
impossible. The truth is that market price moves to find a new barrier at
every level of oscillation, and that is quoting Beverleys own article. Of
course you have to know how to find a way of predicting these levels in
advance, and that is the hard part. Beverley states that the short term
trader cannot know where these reflective barriers will appear as there is
no magic formula. The only part of this I would agree with is the fact that
it is not magic. It is just a formula and there are short term traders
effectively using these levels every day.
Beverley seems to think that technical analysis will not be serious until it can
predict all markets all of the time. When are we going to get measured on a
level playing field with the economists? They cant always tell what has
happened accurately in the past, let alone the future. Economics, with
perhaps the exclusion of Econophysics, has nothing to do with predicting
accurate levels where markets will make significant changes in trend.
Telling me that the bond market may have changed trend after one of the
biggest one month falls in over 50 years is not helpful. Predicting the
collapse and getting short at the highs is useful, which is the level of
accuracy actually provided by technical analysis. Is it possible to trade
markets successfully purely from technical analysis with no knowledge of
economic theory or even access to news? Yes it is. Lets take this a stage
further. It is possible to predict, from technicals alone, where a turning point
will come in a market of such magnitude that it will force commentators to
change their assessment of the underlying economic situation? Economists
tend to write the story to fit the events that they know.
Regarding Gann, Livermore and Elliott failures, does the apparent success
or failure of their personal trading matter? One of the most respected
equity analysts of the past 40 years, who made substantial sums for his
clients, couldnt trade his own account successfully. Did that make him a
failure? Livermore took a huge punt on there not being a Second World
War and stopped himself out permanently. I cant see that this proves
anything except that everyone needs a better money management
system than just blowing your brains out.
Gann however was not a failure. The methods worked then and work
now. Nobody, however ever said that they were easy methods. Anecdotal
evidence suggests that much of the negative information about
W.D.Ganns success came from his son, with whom he appeared to have
been in some kind of dispute.
So back to Beverleys basic conclusion that you cannot make more money
by actively trading a large move compared to the money you would make
by sitting tight for the long haul, I have looked hard at the article and
cannot find any solid evidence furthermore if Beverley is so convinced
that you cannot improve results by active trading does his own trading
strategy actually reflect this?
Malcolm Blazey F.S.T.A. Managing Director TradingSkills.Com
August 2003
Letter
RATING STATUS
10 to 7 Trending up strongly
6 to 4 Trending Up
3 to -3 Neutral
-3 to -6 Trending down
-6 to -10 Trending down strongly
Society of Technical Analysts Ltd (STA)
Diploma Course
15 January 6 April 2004
For the eighth year running, the Society of Technical Analysts Ltd (STA) Education
Committee is holding its Diploma course in Technical Analysis. This year it will be
held at London School of Economics in Aldwych.
The course is a preparation for the Diploma examination in April 2004. It consists
of 11 Thursday evenings starting on Thursday 15 January, followed by a full day
Revision Day (including Report writing), on Tuesday 6 April 2004. Evening
sessions are from 6.00pm to 9.00pm and Revision Day, which includes lunch, from
9.30am to 5.00pm. The Exam itself lasts three hours and will be held later in April
(date to be announced).
The course is expected to cover:
1. Bar charts. Gaps, islands, key reversals. Defining price objectives from gaps and
patterns on bar charts. Arithmetic versus logarithmic scales.
2. Moving averages arithmetic, weighted, and exponential. Centred, non-
centred and advanced. Single, double and multiple moving average
crossovers. Moving envelopes, including Bollinger Bands.
3. Candle charts and candle patterns.
4. Point and figure charts. Construction, scale, box reversal, objective counting.
Advantages and disadvantages compared to other types of chart.
5. Dow Theory.
6. Chart patterns, eg. triangles, flags, pennants, diamonds, broadening patterns
(megaphones), wedges.
7. Reversal patterns and how to identify/anticipate them. Rounding tops and
bottoms, head and shoulders, spikes, double/treble/multiple tops and bottoms.
8. Trend. How to draw correct short, medium and long-term trendlines. Trend
channels. Return lines and internal trendlines. Unconventional but useful
trendlines. Acceleration. Speed lines. Trend characteristics.
9. Consolidation how and why it occurs. Breakouts and how to recognise them.
10. Corrections: when and how far.
11. Support and resistance. The various chart points and facets that can act as such.
12. Basic elements of Gann theory.
13. Basic elements of Elliott wave theory.
14. Fibonacci series, fan lines, arcs and time zones.
15. Cycles. Amplitude, length, phase, harmonicity, synchronicity, left and right
translation. Detrending.
16. Relative performance and how to interpret relative strength charts.
17. Momentum indicators and oscillators including:
Rate of change Welles Wilder's RSI Stochastics (%K & D)
Moving Average Convergence Divergence (MACD) & MACD histogram
Directional Movement Indicator Parabolics Commodity Channel Index
18. Volume signals and indicators, including On-Balance Volume, Volume
Accumulator etc. Open interest.
19. Breadth indicators.
20. Sentiment indicators and contrary opinion.
21. Market Profile (TM).
22. Investor psychology individual and group.
If you would like further information
please contact Katie Abberton on 07000 710207