Dharmik Team DOW technical analysis

DharmikTeam 2012.01.09 13:39 #11

Stochastic Oscillator

In this article we will discuss about a widespread, well-known key element of technical analysis. Why do you think technical analysis especially some elements work so well for financial markets? Why do you think Fibonacci levels are usually strictly followed? Because thousands and billions of traders and computer programs for trading use these elements. This way everybody acts the same at the same time…

This is why we decided to present in the category of technical analysis, the most used and well-known methods of predicting financial evolution. These methods are easy to understand and are very efficient.

We will discuss about the Stochastic Oscillator. We will find out what the Stochastic Oscillator is and how it is calculated. We will use it in our charts and we will see how it acts. We will discover how useful the Stochastic Oscillator is and, at the end, we will draw the conclusions. We will use the Stochastic Oscillator daily in our analyzing and trading system.

1. What is the “Stochastic Oscillator”?

The stochastic oscillator is a momentum indicator used in technical analysis, introduced by George Lane in the 1950s, to compare the closing price of a commodity to its price range over a given time span.

Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

The idea behind this indicator is that prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its moving average.

Two stochastic oscillator indicators are typically calculated to assess future variations in prices, a fast (%K) and slow (%D). Comparisons of these statistics are a good indicator of speed at which prices are changing or the Impulse of Price. %K is the same as Williams’s %R, though on a scale 0 to 100 instead of -100 to 0, but the terminology for the two are kept separate.

2. How is it calculated?

This is the method of calculating the stochastic oscillator, and the values for %K and %D.

A 14-day %K (14-period Stochastic Oscillator) would use the most recent close, the highest high over the last 14 days and the lowest low over the last 14 days. The number of periods will vary according to the sensitivity and the type of signals desired. As with RSI, 14 is a popular number of periods for calculation

%K tells us that the close (115.38) was in the 57th percentile of the high/low range, or just above the mid-point. Because %K is a percentage or ratio, it will fluctuate between 0 and 100. A 3-day simple moving average of %K is usually plotted alongside to act as a signal or trigger line, called %D.

The %K and %D oscillators range from 0 to 100 and are often visualized using a line plot. Levels near the extremes 100 and 0, for either %K or %D, indicate strength or weakness (respectively) because prices have made or are near new N-day highs or lows.

There are two well known methods for using the %K and %D indicators to make decisions about when to buy or sell stocks. The first involves crossing of %K and %D signals, the second involves basing buy and sell decisions on the assumption that %K and %D oscillate.

In the first case, %D acts as a trigger or signal line for %K. A buy signal is given when %K crosses up through %D, or a sell signal when it crosses down through %D. Such crossovers can occur too often, and to avoid repeated whipsaws one can wait for crossovers occurring together with an overbought/oversold pullback, or only after a peak or trough in the %D line. If price volatility is high, a simple moving average of the Stoch %D indicator may be taken. This statistic smoothes out rapid fluctuations in price.

In the second case, some analysts argue that %K or %D levels above 80 and below 20 can be interpreted as overbought or oversold. On the theory that the prices oscillate, many analysts including George Lane, recommend that buying and selling be timed to the return from these thresholds. In other words, one should buy or sell after a bit of a reversal. Practically, this means that once the price exceeds one of these thresholds, the investor should wait for prices to return through those thresholds (e.g. if the oscillator were to go above 80, the investor waits until it falls below 80 to sell).

The third way that traders will use this indicator is to watch for divergences where the Stochastic trends in the opposite direction of price. As with the RSI this is an indication that the momentum in the market is waning and a reversal may be in the making. For further confirmation many traders will wait for the cross below the 80 or above the 20 line before entering a trade on divergence. The chart below illustrates an example of where a divergence in stochastics relative price forecasted a reversal in the price's direction.

3. Chart examples for Dow and e-mini S&P 500.

In the following examples we will use as parameters other values than the standard ones. We decided to do that because our research proved that these new values are used more and numerous well-known traders agree with them. This way the indicator has a higher precision. We will use the values of 5, 5 and 3 for %K, %D and the third parameter respectively.

Here are some examples where we also used other elements of the technical analysis already explained.

1. First we have a daily chart of Dow Jones for the firs three months of 2006. On the chart we have marked minitrends lasting 1-2 weeks. Each trend follows the previsions given by the stochastic oscillator. During these three months there have been at least seven correct sets to be followed that could generate profit.

2. This chart presents the evolution for the period August- October 2003. We can find the same setups and models. Follow closely the logic for each possible transaction.

3. The evolution of the market during June – August 2001, before the tragedy in New York: we can find nine correct sets to be trade and obtain profit.

4. Conclusions

a) Correctly used and followed, the stochastic oscillator along other technical analysis and astrological analysis methods can offer complex and correct information for profitable transactions.

b) Trading methods based only on the stochastic oscillator can be found and can work very well. These methods can be harmoniously correlated with other methods of financial analysis resulting in a complete and complex trading system approaching financial reality.

c) We often use the stochastic oscillator amongst other various methods of analysis that we will describe later.

Dharmik Team

Stochastic Oscillator - Oscillators Stochastic Oscillator - Oscillators Stochastic Oscillator - Oscillators

DharmikTeam 2012.01.09 13:49 #12

Indicator MACD

In this article we will discuss about a widespread, well-known key element of technical analysis. Why do you think technical analysis especially some elements work so well for financial markets? Why do you think Fibonacci levels are usually strictly followed? Because thousands and billions of traders and computer programs for trading use these elements. This way everybody acts the same at the same time…

This is why we decided to present in the category of technical analysis, the most used and well-known methods of predicting financial evolution. These methods are easy to understand and are very efficient.

We will discuss about the MACD indicator. We will find out what MACD means is and how it is calculated. We will use it in our charts and we will see how it acts. We will discover how useful the MACD indicator is and, at the end, we will draw the conclusions. We will use the MACD indicator daily in our analyzing and trading system.

What is MACD?

Developed by Gerald Appel, Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. The resulting plot forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a centered oscillator and the guidelines for using centered oscillators apply.

1. How is it calculated?

The most popular formula for the "standard" MACD is the difference between a security's 26-day and 12-day Exponential Moving Averages (EMAs). This is the formula that is used in many popular technical analysis programs, and quoted in most technical analysis books on the subject. Appel and others have since tinkered with these original settings to come up with a MACD that is better suited for faster or slower securities. Using shorter moving averages will produce a quicker, more responsive indicator, while using longer moving averages will produce a slower indicator, less prone to whipsaws. For our purposes in this article, the traditional 12/26 MACD will be used for explanations. Later in the indicator series, we will address the use of different moving averages in calculating MACD.

Of the two moving averages that make up MACD, the 12-day EMA is the faster and the 26-day EMA is the slower. Closing prices are used to form the moving averages. Usually, a 9-day EMA of MACD is plotted along side to act as a trigger line. A bullish crossover occurs when MACD moves above its 9-day EMA, and a bearish crossover occurs when MACD moves below its 9-day EMA. The histogram represents the difference between MACD and its 9-day EMA. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

MACD measures the difference between two Exponential Moving Averages (EMAs). A positive MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving average is higher than the rate-of-change for the slower moving average. Positive momentum is increasing, indicating a bullish period for the price plot. If MACD is negative and declining further, then the negative gap between the faster moving average (blue) and the slower moving average (red) is expanding. Downward momentum is accelerating, indicating a bearish period of trading. MACD centerline crossovers occur when the faster moving average crosses the slower moving average.

2. Chart examples for Dow and e-mini S&P 500.

a. In the next imagine we have the evolution between March and July 2006. After analyzing the histogram step by step, observing he histogram going below and above zero and correlating the new information with the ones about the trend lines we realize that we could have performed numerous positive transaction in this period. Analyze each setup…

b. Another example is for the time period January – April 2005. we have the same setups and resembling profiles.

c. We have here 5 clear patterns to follow and make profit.

3. Conclusions

1. Correctly used and followed, the MACD along other technical analysis and astrological analysis methods can offer complex and correct information for profitable transactions.

2. Trading methods based only on MACD can be found and can work very well. These methods can be harmoniously correlated with other methods of financial analysis resulting in a complete and complex trading system approaching financial reality.

3. We often use MACD amongst other various methods of analysis that we will describe later.

Dharmik Team

MACD - Oscillators - MACD - Oscillators - MACD - Oscillators -

DharmikTeam 2012.01.18 13:05 #13

DOW and EUR/USD

In this article we will discuss about the correlation between DOW and EUR/USD. We will see if this correlation exists. We will try to find if it is true that both markets share the same money and people. We will find that all these are true. Some chart examples will help us understand why.

We will start first with the type of relation between DOW and EUR/USD (directly or indirectly proportional) and with the degree of correlation. We will see how to come up with a strategy valid for both DOW and EUR/USD or for any other pair of currencies. We will see that it is enough to analyze one chart and then know everything about the other charts (to know what price should have any other financial product at a give moment in time). At the end we will of course draw the conclusions.

Is there any correlation between DOW and EUR/USD?

Let’s look at the next charts:

The firs chart is for Dow in January – August 2007. The second one is for EUR/USD in the same period. Are they correlated?

It doesn’t seem to be any correlation when looking at the details. The degree of correlation varies from a period in time to another. When looking at the big picture there seems to be a correlation, right?

First we have a strong increase until May, then a short decrease, then a High in July and an abrupt downward slope in August. This is the same for both charts.

Let’s observe an earlier period in the past:

This is the time period between January and July 2003. Again we can not find a valid correlation between short time spans, but when observing the monthly trend, we can! After the month of January when the charts are different, we see a neutral February trend, a Low in March, an ascending trend until June and a small decrease in July. There is the same big picture on both charts.

Correlation or not?

2. What kind of correlation is there?

The correlation is directly proportional. Every time Dow raises, EUR/USD grows as well. Every time Dow has a period of descending, EUR/USD goes downwards too.

The long time span charts are very clear but they do not offer enough support. More appropriate are the charts on shorter time spans. The intraday charts are the best.

Study the period between 2007 and 2008 with the help of daily charts! When the trend is neutral you will find differences, but when the trend is strong and the money is moving from one financial product to another within seconds, you will find the correct correlation.

3. Is there enough to analyze the evolution of just one financial indicator to know everything else?

We think so! The logic is simple. When Dow is going up it means that American economy is going well. If the economy is rising, it means that the American currency should be stronger. If the currency goes up, then EUR/USD will go down. This is why the intraday charts show an indirect proportionality. Dow and EUR/USD are in direct proportion on medium and long time spans

When, in 2007, the FED began reducing the reference interest, USD became the carry trading currency. That point forward the correlation became directly proportional on short time spans also.

4. Conclusions:

If an intraday analysis of Dow and S&P 500 shows that these indicators will go down, we can assume that EUR/USD parity will also decrease. Having this information and the information provided by other elements of technical analysis you will find the correct signals for entering and leaving the market and for closing in profit.

Dharmik Team.

Parabolic SAR - Trend Ichimoku Kinko Hyo - Chaikin Oscillator - Oscillators