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This new indicator analyzes the balance between the bulls and the bears.
Every day at the stock exchanges, a battle is waged between the buyers ("bulls"), who
are trying to push prices up, and the sellers ("bears"), who want to push prices down. The
end of the day sees a higher or lower price compared to the day before, depending on
who wins, while the intermediate results and the maximum and minimum prices show the
course of the battle during the day. Since the shifting of power between the bulls and the
bears is one of the first signs of a probable turn of trend, the task of estimating this
balance has often drawn the attention of stock market analysts, who offer varying
solutions.
The most popular method of estimating this power struggle between the bulls and the
bears is the Elder-ray indicator, which was developed and described by technician
Alexander Elder. Elder based the indicator on the following premises:
• The moving average is the agreed-upon price between the sellers and buyers
during a certain period of time
• The maximum price reflects the maximum power of the buyers during the day;
and
• The minimum price reflects the maximum power of sellers during the day.
On the basis of these premises, Elder defines the bull power as the difference between the
maximum price and the 13-day exponential moving average (H-Ema). The bear power is
the difference between the minimum price and the 13-day exponential moving average
(L-Ema).
Figure 1: THE ELDER-RAY INDICATOR. In this chart of Adobe Systems you can
see areas where there are discrepancies in the indicator.
Excerpted from an article originally published in the October 2003 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2003, Technical Analysis, Inc.
2 INDICATORS
To use as examples, I can point to two articles in the January 2004 STOCKS &
COMMODITIES. One, written by D.W. Davies, is based on Joseph Granville's classic
approach and describes the use of on-balance volume in daytrading. The thesis of this
approach is that volume increase confirms and often precedes price increase, while a
decrease in volume signals a high probability of a slowdown in the price increase and the
possibility that prices will reverse. According to Granville, an increase in volume reflects
the accumulation process, which is a prerequisite for an increasing trend to be stable.
Anthony Trongone, the author of the other S&C article, notes that contrary to the classic
theory, his observations for short-term periods show that a volume increase
accompanying price growth is likely to be a bearish signal, while a decrease in volume
during price growth is bullish. At the same time, volume growth during price decrease
indicates a likely change in direction, while volume decrease suggests a continuation.
This, in general, is in accord with Granville's theory.
Figure 1: Price development. Here are the different types of bearish and bullish
resistance.
INDICATORS
Balancing Act
Where is the smart money going? Here's how you can find out.
First, a little background on OBV. The indicator was developed by the technical analyst
and market guru of yesteryear, Joe Granville. He presented a detailed account of this
valuable market tool in his New Strategy Of Daily Stock Market Timing For Maximum
Profits. It is from this book we get the trading maxim "Volume precedes price."
FIGURE 1: USING OBV TO TRADE THE OPENING. Breakouts, breakdowns, and
divergences in the OBV give indications of where the smart money is going.
Excerpted from an article originally published in the January 2004 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2003, Technical Analysis, Inc.