Strength MACD Indicator

We all know that trading volume is a very important factor to consider when doing technical analysis.  For example if a stock moves up on high volume, it usually means more upside in the future because there is more market participation.  If stock price moves up on low volume, there is a high chance that the rally has no strength and momentum is not enough to push the stock higher.

A systematic way of using volume is to use a formula devised by Larry William in his book “The Secret Of Selecting Stocks For Immediate And Substantial Gains”.  The concept is to use the Open, High, Low, Close and Volume to calculate a new indicator.  The formula is given below:

    A = (Close-Open)/(High – Low) * Volume

If A is negative, it means that there is net selling for that day.  If A is positive, it means that the market action is positive for that day.    In order to determine the strength of the buying and selling pressure, we can do a cumulative sum of A and to apply the MACD indicator on A.  I will label this as Strength MACD to differentiate it from the normal MACD based on closing price.

Let’s take a look at how this indicator looks for Singtel.

 You can see from the chart that there are less false signals and the buy and sell signal for the Strength MACD usually comes earlier than the normal MACD charts. 

Property Counter Under Attack

The new measures announced by the Singapore Government to curb speculation in the   property market caused property counters to react negatively on Friday.  With effect from 14 Jan 2011, property owners will need to fork out 16%, 12%, 8% and 4% if they choose to sell their property within the first, second, third and fourth year respectively.  Assuming that a property speculator wants to cash out within the first year of purchase, the property value needs to go up by around 20% in order for the trade to be profitable. 

Property counters voted with their feet down.  Most of them gap down at the open with higher than normal volume. 

In terms of candlestick pattern, Wing Tai and City Dev fared better as both managed to close above their opening price.  If the price is above to go above the high made on Friday, there may be a chance to get a quick profit as the gap starts to be filled.  But with such negative sentiment in the market, it is unlikely that any rally in property counter is sustainable.  The best the bulls can hope for is for the counters to hold on to their support level which is looking increasingly dangerous. 

REIT Yields

CapitMalls Asia is offering $200 million worth of bonds comprising one and three year notes to retail investors.  The yield for the one year bond is 1% pa and for the three year bond is 2.15% pa.  This is better than what you can get from fixed deposits.     If you have a bigger risk appetite, you can consider buying the REITS instead.  The yields from Singapore are generally higher than 4% based on the price as at Jan 6 2011.

Counter	Price as at Jan 6	Current Yield (%)	Forecast Yield (%)
AIMPS AMP Capital Industrial REIT	0.225	9.6	9.24
Ascendas REIT	2.17	6.36	6.54
Ascendas India Trust	0.925	7.24	8
Ascott Residence Trust	1.26	5.83	6.14
Cache Logistics Trust	0.965	7.88	8.88
Cambridge Industrial Trust	0.545	8.99	8.99
CapitaCommercial Trust	1.53	5.03	4.84
CapitaMall Trust	1.98	4.9	5.2
CapitaRetail China Trust	1.25	6.6	6.8
CDL Hospitality Trusts	2.07	4.88	5.27
First REIT	0.74	10.38	NA
Frasers Centerpoint Trust	1.53	5.36	5.69
Frasers Commercial Trust	0.17	6.47	6.47
Fortune REIT (HK $)	3.96	6.09	6.62
India Bulls Property Investment Trust	0.27	8.52	8.52
K-REIT Asia	1.44	4.51	5.35
Lippo-Mapletree Indonesia Retail Trust	0.57	8.25	8.6
Mapletree Industrial Trust	1.07	6.36	7.38
Mapletree Logistics Trust	0.955	6.7	6.7
Parkway Life REIT	1.74	5	5.46
Sabana REIT	0.98	8.81	8.85
Saizen REIT	0.16	1.63	NA
Starhill Global REIT	0.61	6.23	6.56
Suntec REIT	1.43	6.85	6.22

(Extracted from TheEdgeSingapore January 10 2011)

Experts are generally bullish on REITS that invest in commercial properties, industrial properties and those that are focused in the hospitality sector.  So if your fixed deposit is maturing, you have more choices now to earn a higher return.

Double Top and Head & Shoulder Pattern

Chart pattern is used extensively by traders to identify candidates that are likely to make a big move either upwards or downwards.  Traders need to look out for two important patterns in 2011 in order to avoid being hit by a sell down.  These two patterns are the double top formation and the head and shoulder formation

Conditions for double top formation

1. Stock is in an uptrend
2. Forms a high that is lower than the previous high
3. Drops below the valley between the two highs

Conditions for head and shoulder formation

1. Stock is in an uptrend
2. Stock makes a lower high compared to the previous high
3. Stock drops below the neckline between the two shoulders pattern

Note that for these two patterns, the stock price needs to drop below the valley or neckline in order for the pattern to be valid.  Once the formation is complete, the price will usually go down dramatically as these two patterns are closely watched by the bears to identify candidates to short.  

EURUSD Warning Signs

EURUSD is making a comeback for the past few trading days. It has risen above its 20 day moving average which is a positive indication. The MACD indicator is still above its signal line showing that bulls still have the upper hand. But we should not lose sight of the big picture. If you look at the down swing from 25 Nov 2009 to 7 Jun 2010, the currency pair traded from its low in Jun 2010 to re-trace around 61.8% of the complete down swing. This coincides with the Fibnoacci Retracement rule and it still shows that the long term trend for this currency is still to the downside. However, we cannot ignore the fact that the currency is making higher lows and higher highs for the past few months. The danger is for the currency pair to fall below 1.30 level. This will violate the higher high and higher pattern. The 2 day RSI is approaching overbought levels and we will likely see the price testing its 20 day moving average in the next few trading days.

STI Trend Score System

I have covered this method in my previous posting.  I am repeating it here for readers that have missed out on this simple indicator that can be used for trading index ETF like STI ETF.

This is a trend indicator that was derived by by Tuschar Chande. It is a method of rating the trend by comparing the current day’s close to the close x days ago.

If today’s close is greater than close x days ago, score = 1

If today’s close is less than the close x+1 days ago, score = -1

Tuschar Chande suggested comparing the close to the closes from 11 to 20 days ago.

Therefore,

Trendscore = 10 day sum of the scores from days 11 to 20.

The trend score for this case will oscillate between +10 to -10.

The metastock formula is given below:
If(C>=Ref(C,-11),1,-1)+
If(C>=Ref(C,-12),1,-1)+
If(C>=Ref(C,-13),1,-1)+
If(C>=Ref(C,-14),1,-1)+
If(C>=Ref(C,-15),1,-1)+
If(C>=Ref(C,-16),1,-1)+
If(C>=Ref(C,-17),1,-1)+
If(C>=Ref(C,-18),1,-1)+
If(C>=Ref(C,-19),1,-1)+
If(C>=Ref(C,-20),1,-1)

Let’s say that we buy 1 lot of Straits Times Index (STI) when the Trendscore reaches +10 and exit the trade when Trendscore becomes negative.

The trade record is given below:

Position	Entry Date	Entry Price	Exit Date	Exit Price	% Change
Long	12-Jan-07	2995.35	1-Mar-07	3133.88	4.62
Long	15-Feb-07	3222.98	1-Mar-07	3133.88	-2.76
Long	28-Mar-07	3224.55	11-Jun-07	3530.38	9.48
Long	4-May-07	3477.9	11-Jun-07	3530.38	1.51
Long	13-Jun-07	3530.12	27-Jun-07	3513.5	-0.47
Long	15-Jun-07	3601.05	27-Jun-07	3513.5	-2.43
Long	16-Jul-07	3679.97	30-Jul-07	3467.36	-5.78
Long	23-Jul-07	3627.97	30-Jul-07	3467.36	-4.43
Long	6-Sep-07	3374.01	23-Oct-07	3670.21	8.78
Long	11-Dec-07	3583.32	18-Dec-07	3301.42	-7.87
Long	2-Apr-08	3046.54	23-May-08	3160.86	3.75
Long	23-Apr-08	3187.23	23-May-08	3160.86	-0.83
Long	28-Apr-08	3189.2	23-May-08	3160.86	-0.89
Long	5-May-08	3236.1	23-May-08	3160.86	-2.33
Long	14-May-08	3203.42	23-May-08	3160.86	-1.33
Long	16-May-08	3207.43	23-May-08	3160.86	-1.45
Long	11-Dec-08	1821.7	13-Jan-09	1776.25	-2.49
Long	17-Dec-08	1782.09	13-Jan-09	1776.25	-0.33
Long	26-Dec-08	1736.99	13-Jan-09	1776.25	2.26
Long	5-Jan-09	1829.71	13-Jan-09	1776.25	-2.92
Long	24-Mar-09	1664.08	19-Jun-09	2237.2	34.44
Long	24-Apr-09	1859.98	19-Jun-09	2237.2	20.28
Long	1-May-09	1920.28	19-Jun-09	2237.2	16.5
Long	28-May-09	2306.08	19-Jun-09	2237.2	-2.99
Long	16-Jul-09	2389.42	19-Aug-09	2567.72	7.46
Long	9-Sep-09	2660.91	5-Oct-09	2604.53	-2.12
Long	17-Sep-09	2674.42	5-Oct-09	2604.53	-2.61
Long	15-Oct-09	2708.48	29-Oct-09	2648.98	-2.2
Long	12-Nov-09	2740.43	22-Jan-10	2850.98	4.03
Long	3-Dec-09	2796.34	22-Jan-10	2850.98	1.95
Long	14-Dec-09	2800.75	22-Jan-10	2850.98	1.79
Long	23-Dec-09	2823.82	22-Jan-10	2850.98	0.96
Long	24-Feb-10	2782.55	29-Apr-10	2932.04	5.37
Long	2-Mar-10	2774.06	29-Apr-10	2932.04	5.69
Long	9-Mar-10	2834.57	29-Apr-10	2932.04	3.44
Long	5-Apr-10	2943.02	29-Apr-10	2932.04	-0.37
Long	26-Apr-10	2988.49	29-Apr-10	2932.04	-1.89
Long	17-Jun-10	2846.94	13-Aug-10	2927.04	2.81
Long	9-Jul-10	2897.15	13-Aug-10	2927.04	1.03
Long	6-Sep-10	3011.03	28-Oct-10	3124.38	3.76
Long	3-Nov-10	3205.28	24-Nov-10	3126.3	-2.46

The net gain from 2007 to 2010 is around 88% (excluding transaction costs).

How To Identify Strong Or Weak Stocks

In momentum trading, traders pick the strong stocks to go long and weak stocks to go short.    However the key question here is how do you determine if a stock is a strong stock or a weak stock?  

You should be able to tell from the price chart if a stock is looking strong.  For example if a stock keeps making higher low and higher high, it falls into the strong stock category.  By the same token, if the stock is making lower high and lower low, it is considered a weak stock.

A more mathematical method is to compute the distance between the current closing price and its 52 week’s price high and price low to determine which is the stronger and weaker stock trading in the market. 

The formula is as follows:

            Strength = (52 week high – closing price)/52 week high

           

            Weakness = (closing price – 52 week low)/52 week low

If you compute the Strength and Weakness value for every stock trading in the exchange and sort it based on its Strength and Weakness, you get a list of strong and weak stocks respectively.

Based on the 7 Dec 2010 closing price of the 500 stocks in the S&P500 index, the list of strong stocks is:

Symbol	Strength	Close	Sector	Industry
CVX	0.003809237	86.30000305	Basic materials	Major integrated oil and gas
IFF	0.005945979	55.16999817	Basic materials	Specialty chemicals
PX	0.008431655	94.08000183	Basic materials	Synthetics
PPG	0.006667501	80.44999695	Conglomerates	Conglomerates
HRL	0.003592821	49.91999817	Consumer goods	Meat products
MKC	0.008097189	46.54999924	Consumer goods	Processed and packaged goods
CCE	0.008907806	25.59000015	Consumer goods	Beverages - soft drinks
XRX	0.009189692	11.85999966	Consumer goods	Business equipment
AMP	0.006901581	54.68000031	Financial	Asset management
AON	0.007722011	43.68999863	Financial	Insurance brokers
MMC	0.008971954	26.51000023	Financial	Insurance brokers
TMK	0.009245737	61.08000183	Financial	Life insurance
BIIB	0.002971281	67.11000061	Healthcare	Biotech
KG	0.004210556	14.18999958	Healthcare	Drug manfacturers - others
BDX	0.005985165	81.37999725	Healthcare	Medical instruments and supplies
ROP	0.002734462	76.58999634	Industrial goods	Industrial equipment and components
PLL	0.007170708	48.45999908	Industrial goods	Diversified machinery
SNA	0.007656701	55.72999954	Industrial goods	Small tools and accessories
ROK	0.008409406	69.56999969	Industrial goods	Industrial electrical equipment
FISV	0.001701587	58.66999817	Services	Business services
CHRW	0.004169377	76.43000031	Services	Air delivery and freight services
COST	0.005994836	69.63999939	Services	Discount variety stores
EXPD	0.006355943	56.27999878	Services	Air delivery and freight services
MCD	0.007412974	80.33999634	Services	Restaurants
ESRX	0.008229714	54.22999954	Services	Management services
AKAM	0.004964156	54.11999893	Technology	Internet information providers
ADI	0.006820523	37.86000061	Technology	Semiconductor - integrated circuits
TXN	0.006837085	33.40999985	Technology	Semiconductor - broad line
CPWR	0.007023698	11.31000042	Technology	Application software
A	0.007919726	37.58000183	Technology	Scientific and technical instruments

The list of weak stocks is:

Symbol	Weakness	Close	Sector	Industry
EOG	0.08708655	92.70999908	Basic materials	Independent oil and gas
CLX	0.080508095	62.18000031	Conglomerates	Conglomerates
DF	0.036465603	7.389999866	Consumer goods	Dairy products
K	0.051353151	48.90999985	Consumer goods	Processed and packaged goods
CAG	0.057359735	22.01000023	Consumer goods	Processed and packaged goods
GIS	0.066244774	35.04000092	Consumer goods	Processed and packaged goods
CL	0.076454904	78.16999817	Consumer goods	Personal products
CPB	0.079652261	33.90000153	Consumer goods	Processed and packaged goods
BAC	0.061467899	11.56999969	Financial	Regional - Mid atlantic banks
HCBK	0.069451875	11.97999954	Financial	Savings and loans
PBCT	0.070491854	13.06000042	Financial	Savings and loans
FHN	0.082618078	10.09000015	Financial	Regional - Southeast banks
AMGN	0.057103121	53.13000107	Healthcare	Biotechnology
ISRG	0.059337495	260.6499939	Healthcare	Medical appliances and equipment
ABT	0.060284018	46.88999939	Healthcare	Drug manufacturers - major
THC	0.076530538	4.21999979	Healthcare	Hospitals
ZMH	0.086449102	50.27000046	Healthcare	Medical appliances and equipment
LLY	0.09435657	34.11000061	Healthcare	Drug manufacturers - major
LMT	0.037046919	69.44999695	Industrial goods	Aerospace/Defense products and services
PHM	0.083197348	6.639999866	Industrial goods	Residential construction
BIG	0.002465646	28.45999908	Services	Discount variety stores
SVU	0.015853673	8.329999924	Services	Grocery stores
SAI	0.067249496	15.86999989	Services	Technical services
RSH	0.084268381	18.94000053	Services	Electronics stores
KR	0.093890482	20.68000031	Services	Grocery stores
CSCO	0.020526284	19.38999939	Technology	Networking and communication devices
NRG	0	18.85000038	Utilities	Electric Utilities
CEG	0.011255981	28.29999924	Utilities	Electric Utilities
ETR	0.022687719	70.41000366	Utilities	Electric Utilities
FE	0.090864527	35.56000137	Utilities	Electric Utilities

You can derive some basic information based on the list.  For example, the Utilities sector is not doing well whereas Technology sector has more strong stocks.