|
Technical Indicators: S (part 1)
Spreads
Spreads illustrate the difference between the price of two securities. They are usually used for comparing futures.
A spread involves buying one security and selling a second with the goal of making a profit from the narrowing or expanding of the difference between the two securities.
Standard Deviation
Standard Deviation is a statistical measurement of volatility. It measures how widely values range from the average value. The larger the difference between the closing prices and the average closing price, the higher the standard deviation will be and the higher the volatility. The closer the closing prices are to the average price, the lower the standard deviation and the lower the volatility.
High volatility levels can be used to time trend reversals such as market tops and bottoms. Low volatility levels can sometimes be used to time the beginning of new upward price trends following periods of consolidation.
Standard Deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean.
Standard Deviation Channel
The Standard Deviation Channel is two lines plotted parallel to the Linear Regression Trendline. These lines are distanced by n number of standard deviations above and below the LRT.
Over time, prices generally move from one extreme to another. As market participants become overly optimistic, prices are driven up at an unsustainable rate. Likewise, when market participants are overly pessimistic, prices move down at an unsustainable rate.
Given this, markets tend to have an equilibrium pricing point. While the Linear Regression Trendline can help determine where such a point lies, it is the Standard Deviation Channel that is helpful in determining where the extremes fall.
Statistical analysis dictates that 67% of the points on a graph will fall in between one standard deviation above and below the LRT. Increase to two the number of standard deviations and 95% of all the data will fall between these two lines.
If the price happens to go above or below either one of these lines, it should move back into the channel, unless a major trend reversal is taking place.
|
Standard Error
Standard Error measurement is based upon how closely the price of a security falls from the Linear Regression Trendline. The closer prices are to the LRT, the stronger the trend. The more variance from the regression line, the larger the standard error and the less reliable the trend.
High Standard Error values indicate that the price is quite volatile. Any changes in the prevailing trend is usually preceded by a rapidly increasing standard error.
This indicator can be used in combination with R-Squared. Most trend changes are usually preceded by decreasing R-Squared values and increasing Standard Error. When the two are at extreme values and begin to converge, expect a change.
However, be aware that changes in trend does not necessarily mean that an upward trend will reverse to a downward trend. Sideways movement is also considered a change.
|
Standard Error Bands
Created by Jon Anderson, Standard Error Bands are two moving averages based on standard error levels above and below the Linear Regression Indicator. As a type of envelope, they are similar in appearance to Bollinger Bands but are calculated and interpreted quite differently. While Bollinger Bands are plotted at standard deviation levels above and below a moving average, Standard Error Bands are plotted at standard error levels above and below the linear regression plot.
| |
Andersen recommends default values of "21" for the number of periods, a 3-day simple moving average for the smoothing, and "2" standard errors. He also notes that very short time frames tend to produce unreliable results.
Because the spacing between Standard Error Bands is based on the Standard Error of the security, when the two bands are close together, it signifies a strong trend. When the two bands are far apart, prices are more volatile and will tend to fluctuate between the two bands. If the bands are close and then begin to widen, it may signify that the trend is weakening and may possibly be due for a reversal.
· Tight bands are an indication of a strong trend.
· Prices tend to bounce between the bands when the bands are wide.
· Tight bands followed by a widening of the bands may indicate the exhaustion of a trend and a possible reversal.
· When the bands reverse direction after an exhausted trend, prices tend to move in the direction of the bands.
· The r-squared indicator works well in combination with Standard Error Bands. A high r-squared value combined with tight bands confirms a strong trend. A low r-squared value combined with wide bands confirms that prices are consolidating.
Standard Error Channel
Standard Error Channels are calculated by plotting parallel lines above and below the Linear Regression Trendline. The lines are plotted a specified number of standard errors away from the linear regression trendline.
Price movements are characterized by swings from one extreme to the other as the market reflects the collective mood of trader. As the market becomes overly optimistic, prices are driven up. When the mood of the market becomes overly pessimistic, prices are driven down.
Every issue tends to have an equilibrium point towards which prices seem to be drawn to. While Linear Regression analysis can be helpful in determining where this point will fall, Standard Error Channel analysis can show if prices are cycling higher or lower than equilibrium and if a change in trend may be about to occur.
STARC Bands
STARC Bands were developed by Manning Stoller and consist of a channel surrounding a Simple Moving Average. The width of the channel created will vary with the period of the average range and thus gives rise to the indicator's name (Stoller Average Range Channel).
Like Bollinger bands, STARC Bands will tighten in steady or low volatility markets and widen as volatility increases. The difference lies in that rather than being based on closes, STARC Bands are based on the Average True Range. This gives a more in depth picture of the market volatility. While the penetration of a Bollinger Band may indicate a continuation of a price move, STARC Bands define the upper and lower limits for normal price action.
STIX
From The Polymetric Report, STIX is a short-term trading oscillator used to determine the momentum of the market by comparing the volume flowing into advancing and declining stocks.
The STIX indicator is calculated using a variation of the Advance/Decline Ratio and provides a relative percentage of advancing stocks. To calculate first derive the A/D Ratio:
A/D Ratio = ( Advancing Issues / Advancing Issues-Declining Issues ) *100
STIX is then a 21-period (9%) exponential moving average of the above A/D Ratio:
STIX = (A/D Ratio * 0.09) + (yesterday's STIX * 0.91)
The STIX will typically oscillate around 50. Values over 50 are generated when there have been more stocks advancing than declining. Values less than 50 are generated when more stocks have been decreasing in price. A general rule for using the STIX as an overbought/oversold indicator:
· >58: Extremely Overbought
· >56: Fairly Overbought
· <45: Fairly Oversold
· <42: Extremely Oversold
|
