The Indicators and Meaning of Labels

I use 4 different indicators all the time and one indicator rarely. For lack of a better idea, I have given them letter identifications: A, B, C, D, & E.

A Indicator: This is the most sensitive of all the indicators. It either ticks up or down, but never sideways. When there is about to be a change in trend, this indicator will tick the opposite way of the trend. On the following day, the A indicator may tick back in the direction of the trend but I have found that once it begins to flip flop it is very accurate in detecting an upcoming change in trend.

B Indicator: The B indicator moves up or down with the trend, but it will often diverge from the trend and be an early warning that the trend is in trouble and may reverse. It can be early by as much as several days or more than a week.

As an example, around June 22nd, with the SPX around 900 and searching for direction and with all the other indicators pointing down, the B indicator began rising. This divergence continued until the A indicator finally ticked up on July 14th at about SPX 900.

C Indicator: Helps with confirming the move, the momentum of the move, and the trend of the move. As of 8/27/2009 it is in a minor downtrend which has been in place since about 8/12/2009.

D Indicator: This indicator also confirms the move but its strength lies in its ability to indicate the move’s staying power. It travels between an absolute low value up to an absolute high value and once it gets to one of those absolute levels it then stays there. It moves slower and later than the other indicators and sometimes does not make it all the way from a low absolute value to a high absolute value before stopping and turning around.

E Indicator: This one I will rarely use. It is essentially a trend following. What is interesting about the E indicator is its behavior near market tops.

As an example, on 8/27/2009, it is currently behaving in the same way today as it did during early and mid-February of 2009, and in early June of 2009. It will be interesting to see how this situation resolves.

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The following information is being added on Saturday, October 24th, 2009

How the SG’s reveal changes in market moves.

When I sit down to update the SG’s for the $SPX and the $COMPQ, I am looking at a row of six numbers. These numbers are in columns that, for the $SPX, are stacked up from the latest readings all the way back to January, 2009. For the $COMPQ, these columns only go back to August. Over the next few weeks I’ll be working on gathering data on the $COMPQ back to January. There is no way to import the information I use and so it all has to be taken down by hand.

From these numbers I am able to watch momentum and velocity build or wane for each of the four indicators and then I can compare these numbers with other time periods for reference.

Let’s say that on any given day one of the indicators has a reading of 10 and let’s say that on the next day this indicator has a reading of 13, and on the day after that it has a reading of 16. From those increases, I can see that momentum is building at about the same pace. As long as this continues, +/- a digit, then this indicates that the current move in the market will probably continue. But if these readings begin to decrease and do so for more than a day or two, then these decreases signal that the current move in the market is running out of steam and may soon slow and/or reverse.

As an example, the B Indicator, which I use to gauge momentum, reversed and began to move up on Thursday, 10/8. It moved up by about the same degree until this past Tuesday, 10/20, when it more or less came to a screeching halt. It then reversed course Wednesday, 10/21, and had a minuscule loss of momentum on Thursday, 10/22. This past Friday, the numerical loss in this indicator almost matched its numerical gains in the days leading up to this past Tuesday when it essentially stalled. I see this as evidence that down side momentum is increasing. At some point in the future, the numerical losses in this indicator will stall and then reverse and the cycle will start all over again.

Each of the other three indicators behave in the same way. Their numerical values either increase or decrease. I do have to interpret these increases and decreases a little bit and I do this by comparing these changes to other periods, but essentially the numbers speak for themselves.

I just wanted to make clear that, except for the rarely useful E Indicator,  the SG’s are all about numbers. The E Indicator is purely visual but it only comes into play every once in a while and it is of no use right now.