Q&A

Table of Contents:
1. Understanding Reviews
    A. Price
      1. Trend Oscillators
        a. Overbought
        b. Oversold
        c. Compression
        d. Expansion
        d. Compression/Expansion/Compression (CEC) Cycle
      2. Bullish and Bearish Crossovers
    B. Leverage
      1. Leverage Oscillators
        a. Overbought
        b. Oversold
        c. Compression
        d. Expansion
      2. Bullish and Bearish Crossovers
      3. Diffusion Index (DI)
      4. Capitulation Index (CAP)
    C. Time
    D. Sentiment
      1. Sentiment %
      2. Sentiment Oscillators
        a. Overbought
        b. Oversold
        c. Compression
        d. Expansion
      3. Bullish and Bearish Crossovers
      4. Concentration
2. Cycle of Accumulation and Distribution
    A. Bullish and Bearish Setups
    B. Sign of Strength and Sign of Weakness
    C. Cause Building
3. Intermarket Relationships
    A. Gold to Silver Ratio (GSR)
    B. Junior to Majors Mining Shares Ratio (JMR)
    C. Relative Volatility Ratio (RVR)
    D. Small Cap to Large Cap Ratio (SLR)
    E. Put to Call Ratio (PCR)
    F. Advancers to Decliners Volume Ratio (ADVR)
    G. Market Breadth (BRD)
4. Proprietary Indicators
    A. Economic Activity Index
    B. Close Oscillator CloseOsc(E) and Trend Oscillators
    C. Volatility Based Momentum Oscillator MOVB(E)
    D. Trend Energy REV(E)
    E. Standard Normalized STDNORM(E)
5. Definitions
    A. Chasers
    B. Faders
    C. Bagholders
    D. Majority and Minority
    E. Business Cycle
    F. Invisible Hand
    G. Correction
    H. Running Correction
    I. Z-Scores

UNDERSTANDING REVIEWS

The professional investors must profit by anticipating future trends and events rather than chasing old news. This is done by following the invisible hand or message of the market. That message, the simultaneous study of the cycle of accumulation and distribution and price (PRICE), the flow of leverage (LEVERAGE), the flow of time (TIME), flow of sentiment (SENTIMENT), and void of opinions.

Price

Price is the final arbiter of all investment decision-making. Expectations of falling prices warrant only conservative bets until confirmed by price. This makes defining the trend, a function of price, leverage, time, and sentiment, an important aspect of investment discipline. Analysis is based on end of week (EOW) prices. Interweek highs and lows are ignored.

Trend Oscillators (chart 1)

Trend oscillators define the trend of price. The long-term trend oscillator (LTCO) sets the direction of impulse wave. A positive LTCO, for example, defines an up impulse and bull phase. A negative LTCO, however, defines a down impulse wave and bear phase. Green and red boxes highlight up and down impulses, respectively. Impulses vary in duration from weeks, months, and even years highly organized trends. Most impulses are defined by weeks and months.

LTCO readings above and below 50% and -50% define overbought (OB) and oversold (OS) trends, respectively. Overbought and oversold define trends vulnerable to profit-taking/consolidation against or reversal of the trend.

Compression (COMP), a sharp decrease and/or cyclical minimum of volatility within a trend that precedes the oscillation to expansion. BW readings below 25% defines compression. Traders use compression to anticipate rising volatility and acceleration to expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion (EXP), a sharp increase and/or cyclical maximum of volatility within a trend that precedes the oscillation to compression. BW readings above 50% defines expansion. Traders use expansion to anticipate falling volatility and deceleration to compression. Expansion may be observed multiple times before compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Compression/Expansion/Compression (CEC) Cycle

CEC cycle as easy as 1, 2, 3.

The CEC cycle the three phase of up or down impulses. These phases, compression, expansion, and compression are marked 1, 2, 3 (chart 1). For example, a bullish or bearish crossover that coincides or leads compression (1) marks the first phase of the CEC cycle. Expansion (2), the mid point of the cycle, follows compression and generally tightens risk management of the trade. A bullish or bearish crossover that coincides or leads compression (1) completes the cycle and generally reverses the impulse or phase.

The CEC cycle, often a byproduct of consolidation that swings the majority to the wrong side of the trade (bearish) ahead of a bigger upside move, vary in strength and duration. A full cycle, for example, varies in length from weeks to months. Profitability of trading the cycle generally rises as duration increases; short green (or red) boxes tends to be less profitable than longer ones.

Bullish and Bearish Crossovers (chart 1)

Waves transitions from down to up and up to down when LTCO crosses above and below zero, respectively. These transitions are called bullish and bearish crossovers. Bullish and bearish crossovers are indicated as BULL XO and BEAR XO in the trend column of the trend grouping within the COT Matrix

Chart 1: Trend Oscillator



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Leverage

Leverage often leads price. This tendency makes the study of leverage an important aspect of investment discipline.

Leverage Oscillators (chart 2)

Trend oscillators define the trend of leverage. A positive long-term leverage oscillator (LTLO) defines an up impulse, bear phase, and an expectation of falling prices. Conversely, a negative long-term leverage oscillator (LTLO) defines a down impulse, bull phase, and an expectation of rising prices. Green and red boxes highlight down and up impulses, respectively. Impulses vary in duration from weeks, months, and even years for highly organized trends. Most impulses are defined by weeks and months.

The observation of strength when weakness is expected represents a cycle inversion. Cycle inversions, while rare, are common to markets displaying unexpected strength or weakness. This is common during periods of stress.

Leverage oscillator readings below and above -50% and 50% define overbought (OB) and oversold (OS) trends, respectively (chart 1). Overbought and oversold define trends vulnerable to profit-taking/consolidation against or reversal of the trend.

Compression, a sharp decrease and/or cyclical minimum of volatility within a trend that precedes the oscillation to expansion. BW readings below 25% defines compression. Traders use compression to anticipate rising volatility and acceleration to expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion, a sharp increase and/or cyclical maximum of volatility within a trend that precedes the oscillation to compression. BW readings above 50% defines expansion. Traders use expansion to anticipate falling volatility and deceleration to compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Bullish and Bearish Crossovers (chart 2)

Waves transitions from up to down and down to up when LTCO crosses below and above zero, respectively. These transitions are called bullish and bearish crossovers. Bullish and bearish crossovers are indicated as BULLXO and BEARXO in the trend column of the leverage grouping within the COT Matrix

Chart 2: Leverage Oscillators


Diffusion Index (DI) (chart 3)

Diffusion Index (DI), a composite or diffusion of the distribution and movement of money across futures and options measures and intentions of the invisible hand, measures the energy accumulated (stored) to fuel impulses within the cycle of accumulation and distribution. Bullish and bearish setups or cluster(s), DI readings above 60% and below -60%, often represents an unbalanced trend. Unbalanced trends generally have the energy necessary to change the direction of the trend impulse.

Chart 3: Diffusion Index (DI)


Capitulation Index (CAP) (chart 4)

The flow of sentiment generally moves in the opposite direction of price. A rally, for instance, supports optimism that it will continue. A decline supports pessimism that it will continue. This flow, driven by human behavior and observable in all markets, is an important component of the message of the market. It helps investors anticipate rather than simply react to price.

A bullish, self-reinforcing or virtuous cycle encourages others to join the majority by buying. The cycle continues until buyers, the majority, become so large relative to the sellers, the minority, the trend (price) becomes unstable. Declines, varying in size and duration, materialize when the majority, driven by self-preservation and fear, sells over a short period of time.

A bearish, self-reinforcing or vicious cycle flows in the opposite direction. It encourages others to join the majority by selling. The cycle continues until the sellers, the majority, become so large relative to the buyers, the minority, the trend (price) becomes unstable. Rallies, varying in size and duration, materialize when the majority, driven by self-preservation and fear, buys (covers shorts) over a short period of time.

Capitulation index (CAP) measures sentiment behind the trend. Bullish concentration, CAP readings above 50%, define fear and accumulation. This is bullish. Bearish concentration, CAP readings below -20, define complacency and distribution. This is bearish.

Chart 4: Capitulation Index (CAP)



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Time (chart 5)

Price and leverage are directed by time. Price and leverage regardless of direction and magnitude often reverse rather unexpectedly when time is up.

The 5-year seasonal cycle and long-term seasonality (LT Charts: Seasonality) define time.

While price generally follows these tendencies, it can defy them during periods of extreme social, political, or economic stress.

Chart 5: 5-Year Seasonal Cycle



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Sentiment

Sentiment's tendency to lead price (US stock prices), a fact largely misunderstood and under followed by the investment public, makes it valuable timing tool for investors.

Sentiment % (chart 6)

Sentiment towards stocks become more optimistic and pessimistic as stock prices rise and fall, respectively. Bulls as a percentage of bulls and bears (Bull%) represents one of many measures of sentiment towards US Stocks. This statistic is calculated from data released by The American Association of Individual Investors.

Concentrated optimism and pessimism, defined by Bull% closes above and below 70% and 30%, trigger sell and buy signals for stocks. While Bull% generally defines intermediate- and long-term tops from 70% to 80%, they occasionally include buying panics that send it above 80%. The last three 'buying panics' were observed in 1987, 1999, and 2000. Conversely, while intermediate- and long-term bottom materialize from 20% to 30%, they occasionally include selling panics that send it below 20%.

Chart 6 Bull%


Sentiment Oscillators (chart 7)

Sentiment oscillators set sentiment's trend or impulse. The long-term trend oscillator (LTSO) defines the define the direction of the impulse. A positive LTSO, for example, defines an up impulse and bull phase for US stocks. A negative LTSO, however, defines a down impulse and bear phase. Green and red boxes highlight up and down impulses, respectively. Impulses vary in duration from weeks, months, and even years in highly organized trends. Most impulses are defined by weeks and months.

LTSO readings above and below 50% and -50% define overbought (OB) and oversold (OS) trends, respectively. Overbought and oversold define trends vulnerable to profit-taking/consolidation against or reversal of the impulse.

Compression, a sharp decrease and/or cyclical minimum of volatility within a trend that precedes the oscillation to expansion. BW readings below 25% defines compression. Traders use compression to anticipate rising volatility and acceleration to expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion, a sharp increase and/or cyclical maximum of volatility within a trend that precedes the oscillation to compression. BW readings above 50% defines expansion. Traders use expansion to anticipate falling volatility and deceleration to compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Bullish and Bearish Crossovers(chart 7)

Waves transitions from down to up and up to down when LTSO crosses above and below zero, respectively. These transitions are called bullish and bearish crossovers.

Chart 7: Sentiment Oscillator


Concentration (chart 8)

Cycle
The transfer of ownership in which the minority fades the actions of the majority, is driven by human behavior. This behavior oscillates/cycles all markets from greed (optimism) to fear (pessimism), and vice versa (see cycle).

WAS readings below -0.5 and -1 generate minor and major buying opportunities (MnBO and MBO). Readings above 0.5 and 1 generate minor and major selling opportunities (MnSO and MSO). The past three transfers of ownership in which the minority faded the actions of the majority from a position of extreme optimism, have been highlighted by yellow boxes. The most recent transfer generated a major buying opportunity in August 2015.

Chart 8: Sentiment Concentration WAS



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CYCLE OF ACCUMULATION AND DISTRIBUTION

Investors should use mark-ups and downs once price jumps the creek and breaks the ice from accumulation and distribution phases, respectively. Low volume dips and rips that run contrary trend are used as entry points. Investors slowly withdraw from the trend for the safety of the sidelines (sitting on the fence) once a selling or buying climax is identified.

Volume may be more important than price when interpreting price action within the cycle of accumulation and distribution. When price break the ice of support or jumps the creek of resistance, it must be statistically significant. A test - fill and close above support on 5% or more contraction of volume, for example, suggests waning downside force and generates a bullish setup. The bigger the percentage, the more decisive the contraction. An insignificant contraction of volume increase the probability that support will be tested or broken in the near future.

Chart: Cycle of Accumulation and Distribution:


Bullish and Bearish Setups

Bullish and bearish setups represent contractions of volume at support and resistance. For example, a bullish setup is generated when price tests and closes above support on contracting volume. Conversely, a bearish setup is generated when price tests and close below resistance on contracting volume. Each setup represents waning force behind the short-term trend and indicates a potential change of trend ahead.

Sign of Strength and Weakness

Sign of strength (SOS) or sign of weakness (SOW), largely ignored by masses, define daily technical patterns that jump the creek of resistance, break the ice of support, and/or low volume divergences. Experienced traders recognize SOS and SOW as drivers of unexpected outcomes. For example, SOS within consolidation often foreshadow unexpected strength when cause transitions to mark up. SOW within consolidation often lead unexpected weakness when cause transitions to mark down. SOS and SOW observations, when combined with trend, leverage, and time analysis, help anticipate change.

SOS and SOW are also applied to cycles. Cycle inversions, the observation of weakness or strength during a bull or bear cycle, can be SOS or SOW. For example, continuation of a decline during a bull phase for stocks, is a cycle inversion and SOW. This cycle inversion, an indication of strong distribution, increases the probability of a stronger than expected decline when the phase transitions to bear.

Cause Building

Cause defines the building of energy to fuel the next move. For example, consolidation patterns, either demand or supply driven, provide a graphical representation of the accumulation of potential energy that drives the next move. Potential energy is proportional to kinetic energy. The longer the consolidation pattern or cause building phase, the greater the potential energy stored. The greater the potential energy stored, the greater the magnitude and duration of the kinetic energy released. In other words, an asset consolidating and storing (potential) energy for three months that will produce a stronger and longer rally than one consolidating for three weeks.


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INTERMARKET RELATIONSHIPS

All markets - domestic, financial and nonfinancial are interrelated. US stocks, for example, are influenced by not only domestic but also international capital flows. These broad flows influenced by cyclical and secular financial, political, and cultural trends follow long-term ebb and flow cycles found in nature and human behavior. The US stock trend; therefore, is influenced simultaneous money flows across all markets. Intermarket analysis (IM) uses technical and money flow analysis techniques to define direction and magnitude of these trends.

Gold to Silver Ratio

The gold to silver ratio (GSR), a relative money flow measure that often leads the price, defines risk appetite not only for precious metals but also the financial system. A rising and falling GSR trend oscillator suggests risk-aversion and risk-taking towards precious metals, respectively. A back drop of risk-taking anticipates and/or confirms up impulses in gold. A backdrop of risk-aversion, on the other hand, anticipates and/or confirms down impulses.

Gold and silver's impulses are highly correlated. This means they move together with varying amplitude expect for periods of extreme social, political, or economic stress.

GSR 2000-2014


Gold and Silver Impulses or Trends 2000-2014


Junior to Majors Mining Shares Ratio

The junior to major mining shares ratio (JMR), a relative money flow measure that often leads price, defines risk appetite for precious metals. A rising and falling JMR trend oscillator suggests risk-taking and risk-aversion towards precious metals, respectively. A back drop of risk-taking anticipates and/or confirms up impulses in gold. A backdrop of risk-aversion, on the other hand, anticipates and/or confirms down impulses.

JMR 2000-2014


Relative Volatility Ratio

The relative volatility ratio (RVR), a relative money flow measure that often leads price, defines risk appetite for US stocks (S&P 500). A rising and falling RVR trend oscillator suggests risk-taking and risk-aversion towards US stocks, respectively. A back drop of risk-taking anticipates and/or confirms up impulses. A backdrop of risk-aversion, on the other hand, anticipates and/or confirms down impulses.

RVR 2000-2014


Small Cap to Large Cap Ratio

The small cap to large cap ratio (SLR), a relative money flow measure that defines the health of a rally or decline, indicates whether the small cap stocks, the broader market or "troops", are following the large cap stocks or "generals". An up impulse suggests that the troops are leading the generals, while a down impulse suggests the opposite. A falling SLR, an indication of poor relative strength of the broader market against the large caps, often warns that market breadth is weakening. As a rule, the greater the number of stocks trending in the same direction, the higher the chances of that trend continuing.

SLR 2000-2014


Put to Call Ratio

The Put/Call Ratio (PCR), an intermarket relationship that defines short-term sentiment toward stocks, compares put and call volume. Put options hedge against market weakness or bet on a decline. Call options hedge against market strength or bet on advance. Sentiment is bearish and bullish when PCR closes above and below 1, respectively. Extreme concentrations, indication of extreme sentiment and trend imbalance, signal FADERS to enter the trend.

PCR


Advancers to Decliners Volume Ratio

The Advancers to Decliners Volume Ratio (ADVR), an intermarket relationship that defines short-term impulse for stocks, compares advancing and declining and volume on the Nasdaq or NYSE exchanges. The impulse is up (bullish) and down (bearish) when VADR closes above and below 1, respectively. Extreme concentrations, indication of extreme sentiment, trend imbalance and capitulation, confirm broader impulses.

ADVR


Market Breadth

Breadth gauges the direction of the US stock market's trend by comparing the number of companies advancing relative to the number declining. Positive breadth, a rising trend defined by advancing shares exceeding declining shares, suggests a bull phase. Negative breath, a falling trend defined by declining shares exceeding advancing, suggests a bear phase. Positive and negative divergences of breadth relative to price often foreshadows a change of trend in price. For example, higher highs in breadth relative to price, an indication of the accumulation of energy yet to be manifested in price, favors continuation of price to higher highs eventually. Lower lows in breadth relative price, also an indication of the accumulation of energy, favors continuation of price to lower lows eventually.

PCR



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PROPRIETARY INDICATORS

Economic Activity Composite

The Economic Activity Composite (EAC), a proprietary multi-variable composite of mostly market-based variables, represents a leading measure of economic activity within the United States.

EAC 2000-2014


CloseOsc(E) and Trend Oscillators

CloseOsc(E) is a multi-period momentum indicator that establish direction, magnitude (size), time, and amplitude (volatility). For example, an CloseOsc(E) reading above 0 suggests positive momentum. The higher or lower the the reading, the greater the momentum push. Momentum pushes expand volatility which pushes the upper and lower bands apart. When volatility contracts, i.e. squeezes price like a tube of toothpaste through the bands, it suggests increased volatility ahead.

The trend oscillators of COT analysis use the same construct as CloseOsc(E).

A bullish COT trend, for example, is defined by positive trend oscillators. Conversely, a bearish trend is defined by negative readings. A change in trend is defined by a transition of sign in the trend oscillators. A bullish technical trigger, for example, is generated when the trend oscillators cross over from negative to positive. This is called a bullish crossover. The setup is reversed for a bearish technical trigger.

MOVB(E)

MOVB(E) is a momentum indicator that adapts to the volatility of the trend. Adaptation is important as traditional momentum indicators tend to be fixed period.

REV(E)

REV(E) represents the kinetic and potential energy of the trend not captured entirely by price.

STD NORM(E)

STD NORM(E) standardizes price within a normal distribution of n observations. The probability of continuation (rally or decline) decreases exponentially as the standardized observation, called a Z Score, increases beyond 1.96.


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Definitions

Chasers

Chasers buy and sell in sympathy with price direction. For example, chasers buy bullish crossover and sell bearish crossovers.

Faders

Faders trade against the direction of the trend and sentiment of the majority. A fader using fading tactics such as selling bullish crossovers or buying bearish crossovers. These tactics are known as "fading".

Bagholder

In US financial slang, a bagholder is any owner (usually share holder) left holding a bag full of worthless material. In the investment world this bag is filled with worthless stocks, bonds, or other claims to productive capacity. The bag holder, convinced by ego or pride, often refuses to dispose of them despite growing evidence that they could become worthless or unsellable.

Majority and Minority

Cycle
The majority and minority refers to the population of investors supporting a trend. The majority fuels market at tops and bottoms because they are consistently wrong about direction. Flash crashes, the subject of trading desk conspiracies - high frequency trading and paper price suppression in futures markets, are byproducts of human behavior. Flash crashes can materialize out of nowhere when the vast majority of investors, for example, are extremely optimistic towards US stocks (extreme greed) attempt to sell under what is usually emotional distress (see cycle). The intentions of majority (sell stocks - supply) simply overwhelms that of the minority (buy stocks - demand).

Business Cycle

Business Cycle
The business cycle, a concept believed manageable or dead by countless experts, has been pushing a hesitant Fed into policy corner. The Fed either raises rates soon, or prepares itself for the inevitable finger pointing (of blame) when the invisible hand, the true driver of the business cycle and global economic policy, force them to do so under a backdrop of fear, panic, and unexpected market moves - bonds, stocks, currencies, precious metals, etc.



Invisible Hand

Also known referred to as the message of the market.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776

"Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Correction

A correction is a reverse movement of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines, countertrend moves, interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

Running Correction

Not all corrections, however, are obvious. Consolidations, often delayed or difficult to recognize by as much as six months, can occur as price declines, chops sideways, or increases. The latter, the observation of strength when weakness is expected, is called running corrections. They're a sign of strength (SOS) that often setup powerful rallies once completed.

Z-Scores

The probability distribution of the normal random variable, called the normal distribution, is often depicted as a bell-shaped symmetrical curve. The normal distribution is centered at the mean. The probability that the random variable takes on a value within a certain range is determined by computing the area under the curve that defines the probability distribution between the limits.


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