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Technical Indicators & Overlays
LATEST TECHNICALLY SPEAKING ARTICLE:
June 20, 2015
Technical analysis is the study of price and volume activity to try to predict how prices will move in the future. As investors and traders, we are most concerned with price action, since this determines our gains and losses. However, ignoring volume can be a mistake. While the market determines the price of a security, the underlying trading volume represents the level of interest in that determination. Without knowing the trading volume of a security, we do not know how much conviction there is in a move. If a small amount of volume is moving a stock price, the odds are lower that the move is sustainable. Alternatively, if we see price moves on high volume, this may indicate the trend is sustainable.
Traditionally, volume is incorporated into a price chart via volume bars that are typically drawn at the bottom of a price chart. Without the volume bars, you cannot see the level of trading activity associated with price moves. However, there is a unique type of chart that incorporates volume into each period’s price plot—equivolume. Developed by Richard W. Arms Jr., who is also responsible for the Arms Index (TRIN indicator), equivolume charts look similar to candlestick charts, but the candlesticks are replaced by equivolume boxes that may be square or rectangular. Arms came up with Equivolume because he felt that “volume needed to be made a full partner with price to understand the underlying dynamics of price movement.” Integrating volume with price plots makes it easier to verify the trading volume for price tops and bottoms, support and resistance breakouts, and more.
Referring to Figure 1, equivolume boxes consist of three components: high price, low price and trading volume. One box represents one period, which can be a day, week, month, etc. The high price for the period forms the upper boundary of the equivolume box, the low price of the period forms the lower boundary and the relative volume for the time represented by the chart indicates the width of the equivolume box. For “up” periods, when the closing price is above the prior period’s close, the equivolume box is black. When the period’s closing price is below the prior period’s close, the equivolume box is red.
Measuring the momentum of net advancing issues, the McClellan Oscillator can indicate possible trend reversals in market indexes.