Beruflich Dokumente
Kultur Dokumente
Sink Or Swim
Detecting Breakouts
The finite volume elements (FVE) indicator is yet Bostian) or the open (Williams) of the day.
another money flow indicator but it takes into On the other hand, the best-known money flow
account both intra- and interday price action. indicators that use interday price changes are on-
balance volume (OBV), David Marksteins volume-
ost technical analysts underestimate price trend, and the money flow index (MFI), which
M
volume indicators in favor of price- is a volume-weighted relative strength index (RSI).
based indicators or price pattern rec-
ognition. Volume often leads price, CONFLICTING SIGNALS
and volume indicators can predict What if an intraday indicator conflicts with an interday
this price change by observing the delicate balance of indicator? Is money flow confirming price action or
supply and demand in the never-ending battle be- diverging? This is a common situation, and usually
tween buyers and sellers, bulls and bears. To help occurs when a stock gaps at the open usually because
analyze crowd psychology and profit from subse- of breaking news (often earnings reports) after the bell.
quent price moves, I created the finite volume ele- For example, if a stock gaps down at the open, the stock
ments (FVE) indicator. often becomes oversold. Retail investors seeking bar-
gains will then do some buying, causing the stock to
VOLUME-BASED INDICATORS close above its open for that day on heavy volume. In
Money flow, accumulation/distribution, and balance that case, despite the stock being sold off heavily
of power are all terms synonymous with volume- overnight, intraday indicators will be positive. In con-
based indicators. I have been using volume indica- trast, interday indicators will remain negative.
tors for some time as my prime tools in making In other circumstances, usually when good or bad
trading decisions, and Ive found that divergences news is about to break, intraday indicators can also be
between volume and price are often the only clues to correct in predicting a breakout or breakdown. The
important reversals. following example makes this clear: A biotech com-
Volume indicators use intraday (the relation of the pany is researching a new cancer drug with positive
close to the midpoint of the day) or interday (todays results, but no news has been released yet. The stock
price relative to yesterdays) price action to calculate moves sideways or down, but a few insiders buy the
whether money is flowing in or out of a security. The dips, causing it to close persistently above the open
best-known intraday money flow indicators include or midpoint of the day. In another example, an
Marc Chaikins money flow index (CMF), David unscrupulous analyst intends to upgrade a stock. He
Bostians intraday intensity, and Williams accumu- leaks this news to his firms best customers and
lation/distribution. These all ignore the stocks price possibly a few of his friends and relatives, thus
change relative to the past, but calculate accumula- allowing these investors to purchase the stock before
tion or distribution according to the relation between the announcement.
the closing price and the midpoint (Chaikin and In both of these cases, interday indicators may be
neutral or negative, as the stock will move sideways
or slightly down. Intraday indicators, on the other
hand, will diverge from price and may correctly
by Markos Katsanos
predict a breakout.
Copyright (c) Technical Analysis Inc.
PATRICK KELLEY Stocks & Commodities V. 21:4 (26-38): Detecting Breakouts by Markos Katsanos
1 A pure volume indicator has more FIGURE 3: MANUGISTICS GROUP (NASDAQ:MANU). Bottom window: price and FVE. Top window: 22-day FVE.
power to contradict.
2 The number of buyers or sellers
(which is assessed by volume) will Chaikin money flow (0.13693)
be the same, regardless of the price C
fluctuation. A
B
3 Price-volume indicators tend to
spike excessively at breakouts or On-balance volume (23,750.00)
breakdowns.
USING FVE A
FVE gives two types of signals. The B
most obvious and ordinary is the slope
Manugistics Group (3.95000, 3.95000, 3.59000, 3.60000, -0.40000)
of the FVE line. An upward slope indi-
cates the bulls are in control; a down-
ward slope suggests the bears are in
control. The strongest signal, however,
is the divergence between price and the
indicator. This takes some time, at least
a month, to develop on a daily chart. A B
27 4 10 24 1 8 15 22 29 5 12 19 26 3
When FVE diverges from price, it shows September October November Dec
that the current trend is becoming weak
and is ready to reverse. FIGURE 4: MANUGISTICS GROUP (NASDAQ: MANU). Top window: 22-day CMF. Middle window: OBV. OBV was
You also need to take into consider- bearish, making a new year low at B. Surprisingly, CMF was also bearish, making a lower high at C.
ation the location of FVE relative to the
zero line. An FVE value higher than zero indicates accumula- a particular stock. The smaller the number, the more sensitive
tion; the opposite is true for negative values. A logical buy the indicator becomes. A technique that can be used to spot
signal would be for FVE to diverge from price, make a series of stocks in the early stages of breaking out is to plot two FVE
higher highs and/or higher lows, and then cross (or be about to indicators using two different time frames. Plot them in differ-
cross) the zero line. It can also as long as it is not negatively ent colors in the same window. In the beginning, both FVEs will
divergent confirm price action. be negative, but as the stock starts to break out, look for the 15-
I use a period of 22 days, but as with other indicators, you day FVE to go positive first and rise above the 26-day.
may wish to vary the period to determine what works best for Ironically, FVEs strongest point divergence from price
is also its weakest. Youll find that sometimes it is too early,
than sorry). 20
35-day linear
-40
-50
ever, FVE went from deeply negative to
regression -60
-70 positive values. It crossed the zero line
-80
System Report FVE DIVERGENCE wLRS, XM Satellite Radio (XMSR) Results, Test period 12/28/992/15/02
Item FVE MA Item FVE MA
System System
Total net profit 4395.16 1.48 Open position value N/A N/A
Percent gain/loss 439.52 0.15 Annual percent gain/loss 185.89 0.06
Initial investment 1000 1000 Interest earned 0 0
Current position Out Out Date position entered 12/27/01 2/15/02
Buy/hold profit 0 0 Days in test 863 863
Buy/hold pct gain/loss 0 0 Annual B/H pct gain/loss 0 0
Total closed trades 4 13 Commissions paid 120 390
Avg profit per trade 1098.79 0.11 Avg Win/Avg Loss ratio N/A 2.26
Total long trades 4 13 Total short trades 0 0
Winning long trades 4 4 Winning short trades 0 0
Total winning trades 4 4 Total losing trades 0 9
Amount of winning trades 4395.16 526.54 Amount of losing trades 0 0
Average win 1098.79 131.63 Average loss N/A 0
Largest win 2718.06 234.27 Largest loss 0 0
Average length of win 35.5 35 Average length of loss N/A 10.22
Longest winning trade 51 52 Longest losing trade 0 44
Most consecutive wins 4 1 Most consecutive losses 0 4
Total bars out 458 386 Average length out 91.6 27.57
Longest out period 155 149
System close drawdown 0 0 Profit/Loss index 100 0.28
System open drawdown 0 0 Reward/Risk index 98.37 0.8
Max open trade drawdown 0 0 Buy/Hold index 8017.73 102.67
TRADES
Trade # Trade type Entry date Close date Profit Reason for close
Out 10/7/99 5/17/00 0 Enter long signal
1 Long 5/17/00 7/6/00 399.08 Close long signal
Out 7/6/00 1/2/01 0 Enter long signal
2 Long 1/2/01 2/1/01 219.13 Close long signal
Out 2/1/01 4/26/01 0 Enter long signal
3 Long 4/26/01 6/13/01 1058.88 Close long signal
Out 6/13/01 10/16/01 0 Enter long signal
4 Long 10/16/01 12/27/01 2718.06 Inactivity stop
Out 12/27/01 2/15/02 0
FIGURE 8: PROFIT AND LOSS REPORT. Here you see that the FVE was more profitable than a moving average system.
were: First, FVE should cross the -5 line upward, and second, Volume action in the large-cap or major index component
linear regression slope values for FVE and price should be stocks tends to be distorted due to program trading, portfolio
positive and negative, respectively. adjusting, tax selling, index trading, and so on, so volume-
Specifying the sell criteria is the most difficult part of based indicators might not give signals that are as reliable as
designing an FVE-based system. I tried various sell conditions those for smaller-cap, non-index stocks. On the other extreme,
based on FVE and FVE divergence but found that using just for some reason penny stocks do not always respond to indica-
technical indicators alone does not always yield the most timely tor divergences. It is a good idea to test the reliability of the FVE
results. The method could be enhanced using money manage- on historical price charts when selecting a stock to trade based
ment (inserting a stop or profit target, or closing the position at on FVE divergence. Further, using mechanical systems for
a predetermined time after entering). In XMSRs case, a sell was identifying divergence might be more objective, but it is a good
initiated when either the 25-day FVE linear regression sloped idea to verify them visually before making any final decisions.
down, or at the latest, 50 days from the buy signal. I got the best results by using FVE in conjunction with classic
technical analysis formations such as the cup-with-handle,
CONCLUSION saucer, and triangle, as well as stocks that are building a base.
I have done extensive system testing and found that the FVE FVE provided an opportunity to identify stocks early in a cup-
works best for small-cap and volatile securities such as Internet, with-handle formation. You can initiate a trade in the early
software, communications, computer, and biotech stocks. stages of the right side of the cup being formed rather than wait
A B C D E F G H I J K L M N O P
MANUGISTICS NASDAQ:MA
GROUP NU
TYPICAL +/- AVE
<DATE> <OPEN> <HIGH> <LOW> <CLOSE> <VOL> H+L/2 TYPICAL C-(H+L)/2 PREVIOUS .3%*C MF VOLUME SUM VOL FYE
for the handle to form, thus increasing your profits dramati- Bostian, David, Jr. [1985]. Intraday Intensity Index, Encyclo-
cally. FVE will also help you determine the direction of the pedia Of Stock Market Techniques, Investors Intelligence.
breakout from triangles. Colby, Robert W., and Thomas A. Meyers [1988]. The Ency-
Last but not least, keep in mind that there are no certainties in clopedia Of Technical Market Indicators, McGraw-Hill.
the financial markets only probabilities. FVE will increase your Hartle, Thom [1994]. Chatting With Marc Chaikin, inter-
probability of winning, but good money management will help view, Technical Analysis of STOCKS & COMMODITIES,
you avoid large losses and maximize your profits. You should Volume 12: January.
always use stop-loss orders to protect your capital or profits. Holt, Phillip C. [1994]. Enhancing On-Balance And Negative
Volume, Technical Analysis of STOCKS & COMMODITIES,
Markos Katsanos is a structural engineer and private trader. Volume 14: June.
Storz, Matt [1996]. Quantifying Divergence With The Diver-
SUGGESTED READING gence Index, Technical Analysis of STOCKS & COMMODI-
Achelis, Steven [1995]. Technical Analysis From A To Z, TIES, Volume 14: January.
McGraw-Hill.
A Survey Of Volume Indicators [2001]. Bollinger Capital
Management. Video, See our Traders Tips section this month for strategies implementing
Katsanoss concepts.
www.BollingerOnBollingerBands.com
S&C
See Traders Glossary for definition