Elder Ray Indicator - Shanghai Index

The Shanghai Index dropped by 177.75 points to end at 4192.53. A slight divergence is emerging for the Elder Ray indicator as shown in the chart above.

The divergence that is developing now is not as great as the one we saw on Dec 2007. So my personal view is the index will not stage a strong recovery.

Elder Ray Indicator Case Study - Wing Tai

Elder Ray Indicator

This is an indicator that is covered in many of Dr Alexander Elder’s books. The Elder Ray formula is given below:

Bull Power = High – Exponential Moving Average (EMA)
Bear Power = Low – Exponential Moving Average (EMA)

This indicator uses the high and low price to gauge the power of the bulls and bears respectively.

Let’s look at this indicator being applied to Wing Tai holdings. This is a property counter listed in Singapore.




The Red histogram is the Bear power and Green histogram is the Bull power. For this chart, I am using 22 day EMA.

You can see that at region A, when the price cuts below the 22 day EMA, the price rebounded to test the 22 day EMA again. This gives opportunity for the Bears to short the market. The scenario repeated itself in region B.

There is currently a divergence which means that there may be a reversal once the price goes above the 22 day EMA.

Let’s look at one case when a divergence occurs and what happen after the price breakout of the 22 day EMA.



We see that at region E, the price of Wing Tai made a lower low. However both the Bull and Bear Power did not make a lower low. A very obvious divergence occurred.

Once the price breakout from the 22 day EMA, it went all the way until Jul 07.

For more information on Elder Ray indicator, you can refer to the book Come Into My Trading Room