Trend Check with Tushar Chande

The Shortest Distance Between Two Points is a Crooked Line

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"The shortest distance between two points is a crooked line."

Sure, that may be out of line with Archimedes, but it is perfectly in line with how markets work.  If nothing else, that's what two decades of trading the futures markets taught me. The title just means that we typically underestimate the randomness of the markets and overestimate our ability to predict them.

I am Tushar Chande and welcome to my first blog post on StockCharts.com.  I know many of you will question the wisdom of launching a new blog on April Fool's Day (trivia buffs: more on this at the bottom of the post).  But hey, I am used to market risk, since my "stock equivalent positions" exceeded many hundreds of millions of dollars as a CTA and hedge fund manager.


At the outset, I must thank Chip Anderson and the entire team at StockCharts for giving me this opportunity.  It is a daunting task to write a blog for such a diverse and highly experienced audience.  So please, help me write about topics that interest you, by sending me your comments and feedback, early and often, as they say in Chicago.

Chip wanted me to be autobiographical in my first post.  So, at the risk of boring all of you, here is a brief summary.  I have a PhD in Engineering from the University of Illinois, where I worked on mathematical models and applications of high power lasers.  I also have an MBA in Finance from the University of Pittsburgh (so... a Steelers fan).  I am reasonably good at visualization and modeling: I have more than 10 US Patents and many publications in the scientific literature (with over 200 citations).  I eventually took up trading, and have written several books and invented many innovative technical indicators that are now quite popular (see for example, the Aroon and stochastic RSI in the StockCharts Indicators palette).  I have developed and traded systematic strategies in the futures markets for about two decades.  I also created an integrated trading platform over two decades ago that was well ahead of its time.  In other words, I have worn many different hats and punched well above my weight.

In this blog I will "Trend Check" the markets, and try to answer the deceptively simple question, "Is the market (or stock, or ETF) trending?"  As you probably suspect, I think like a trader, but analyze like a numbers geek.  So, you will see a more numbers-driven (rather than chart-based) approach, not unlike Erin Heim's Decision Point Alert blog.  As a welcome gift to you, Chip and Co. have added the Chande Trend Meter (CTM) to the indicators list (see Chart 1).  It is my quantitative answer to the question I just posed.


                                  Chart 1: A Blog-warming Gift - Chande Trend Meter (CTM) Indicator


Chart 1: Berkshire Hathaway stock price with the Chande Trend Meter plotted in the lower panel. The color code quickly shows the classification of trend strength (pink = strong down), to flat-to-down (yellow) and through various shades of green to dark green for the highest trend strength.


The Chande Trend Meter (CTM) combines eleven different technical indicators/measurements across six different time frames to give a composite reading.  Overall, it is an absolute measure of trend strength, and that is how it differs from the StockCharts SCTR line, though the two look somewhat similar (see Chart 2).  The design of CTM requires so many trade-offs, that it is simply too troublesome to delve into how the sausage was made, though you can rest assured that it is based on hard-won experience.  Just use it and enjoy.

 

          Chart 2: Panera (PNRA) with Chande Trend Meter (CTM) and the StockCharts SCTR line

Chart 2: The CTM measures the absolute trend strength, whereas the SCTR measures the relative trend strength.  Overall, they "look similar" because they are derived from the same underlying price data, but the rate of response of the CTM is faster, by design. Naturally, the desired speed of response varies from application to application. Notice how CTM dipped into the pink zone when the stock was falling quickly in October. Sideways price action left the CTM in yellow (say in December). Now look at the rally since February. CTM pushed above 80, into the darker green areas and stayed there.  So, CTM answers the question at a glance , "Is PNRA trending?".

Of course, CTM is backward looking, and does not answer the follow-on question, "Will the  market (or stock, or ETF) continue to trend?", to which my answer is we will follow the trend, and assume that the strongest trends are most likely to continue, Newton's law and all that.  Of course, many of them will not, but that will not deter us from our appointed rounds of systematic analysis.

One of the key principles driving this blog will be data compression.  All of you are busy, and have many other irons in the fire.  My job is to boil things down, to concentrate the information into nuggets of valuable information.  The Chande Trend Meter is information compression in action. For example, it can be applied to the sub-sectors within the S&P 500 and key index ETFs (see Chart 3).  Thus you can see at glance which sectors are trending well.  For example, John Murphy highlighted the Consumer Discretionary sector (XLY) in his recent post and it just happens to be the strongest one at the moment.

Chart 3: We show the Chande Trend Meter applied to key indexes and sectors with the S&P 500.  The Consumer  Discretionary sector SPDR (XLY) is the strongest at the moment, and was highlighted in Chart 9 of John Murphy's recent post

 

I've gone on too long already. So, till my next post, remember, there is strength in numbers.

 

A brief detour back in time.  "Inter Gravissimas", Pope Gregory XIII's papal bull from February 24, 1582 set up the Gregorian Calendar, in order to standardize the date for the Spring Equinox at March 21.  Since many people used to celebrate the new year around this time, and under the old calendar the dates would slip, the new year was often celebrated around April 1.  However, the Pope had to wait till Britain adopted the Gregorian Calendar on Wednesday September 2, 1752, and determined that New Year's be celebrated on January 1.  Not every one got the news, for after all, this was the age of the yokel net, and those who celebrated New Year's on April 1 were mercilessly pranked. So there you have it. It may be a new blog, but its not the new year.

 

For more, please visit my website: www.etfmeter.com

- Tushar

 

Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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