After 30+ years in the financial markets, technician Tom Aspray has seen just about every kind of indicator available, but there are two that he has found particularly effective, which he shares here.
There are a wide range of technical indicators that traders and investors can use to determine the market's trend and to pick stocks. I have found that the most effective combination of indicators use either different data or non-correlated data.
For example, if you were to use the MACD-His, RSI, and stochastics you are likely to get similar results from all three as all are based solely on price. In many of my columns I generally feature two key technical tools even though I do use others.
The first is the on-balance volume (which I discovered from Joe Granville's book before I even had my first computer), which is my favorite volume tool and one that I have used confidently since the 1980s. Looking at the monthly, weekly, and daily OBV analysis can give you a good idea whether a market is being accumulated or distributed.
In the past ten years or so, I have relied more heavily on the relative performance. It measures how a stock or an ETF is performing relative to a benchmark like the S&P 500. In an up market, those stocks that have positive RS trends in all time frames do better than the overall market. Also, when a market is correcting, these stocks will generally decline less than the overall market.
To determine support or resistance level, I like to combine my chart analysis with Fibonacci and the monthly/quarterly pivot levels. The pivot analysis was added after John Person was kind enough to share with me his unique methodology.
When the Fibonacci and pivot analysis highlight the same levels of support or resistance, it can identify high-confidence price levels of where you should be buying or selling.
In this week's lesson, I want to demonstrate how two non-related technical tools can help you determine changes in the market's trend. This first is the McClellan oscillator, which was developed by Sherman and Marian McClellan and is calculated from the A/D data. The second is a sentiment indicator, the Total Put/Call ratio (P/C), which measures the volume of puts traded divided by the volume in calls. It can be downloaded free from the CBOE.
On the bottom of the NYSE Composite chart, I have plotted the eight-period WMA of the Total Put/Call ratio in green and the three-day SMA in red. I added this so that it could be used by the TradeStation platform.
When the ratio is above 1.0, it means that more puts are being traded than calls. So a reading of, say 1.2, indicates that a majority are bearish. Conversely, a reading of 0.5 indicates that twice as many calls have traded than puts, which reflects a high level of bullish sentiment.
The first chart covers the period from February-August of 2007. At the end of February, the stock market had its biggest one-day drop in five years as it reacted to the selling in the Chinese market. The NYSE Composite traded below its starc- band for five days ending on March 5 (line 1) as the McClellan oscillator hit -307.
Stocks rebounded for five days before dropping once more as the NYSE made a lower low (line a) on March 14. The McClellan oscillator only dropped to -60 and therefore formed a positive divergence as indicated by line b.
NEXT PAGE: Examples of the McClellan Oscillator's Use