Trend Check with Tushar Chande

A Workaround for the Greg Morris Weight of Evidence Trading Model (the Chande Trend Meter).

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Greg Morris has written a wonderful series of posts on developing a trend-following system, essential reading for all serious traders.  In his most recent post on the subject, he summarizes the nine indicators used in the model, and shows the Morris Weight of Evidence (WOE) indicator applied to the NASDAQ Composite index (see Chart 1).  Unfortunately, it is not possible to easily plot the WOE at the moment.  I have a possible work-around for fans of Greg Morris's WOE indicator.  I will show that the Chande Trend Meter (CTM), which is also based on a trend-following approach, is a reasonable substitute for the Morris WOE.

 

Chart 1: The Greg Morris Weight Of Evidence (WOE) indicator as shown in Chart A of his recent post on the $COMPQ (used with Greg's permission).


 

Structural Similarities

Four of the nine indicators in the WOE are based solely on price, whereas the remaining five are tied to volume and market breadth.  All the indicators in the Chande Trend Meter (CTM) are price-based indicators, covering many different time intervals, chart patterns and momentum measures.  Naturally, the two indicators have different weights, components and time periods underlying their calculations, and a perfect match is impossible.
As a practical matter, since many of the volume and breadth measures are highly correlated to price-based trend measures during strong trends, as a first approximation, the price-based indicators alone should push the two indicators along correlated paths during strong trends.

 

The Morris WOE Indicator

In his most recent post, Greg shows his WOE indicator on the NASDAQ composite, and I have taken the liberty to reproduce only the topmost panel of his Chart A to show the evolution of his trend-following model (see Chart 1 above).  The model uses a binary approach, so that a sub-indicator value is pinned to say +1 or -1 when it is above (or below) the signal line, which means that day-to-day fluctuations are ignored, and hence the WOE as a whole has the characteristic binary signature of repeating values (say 100) for many days in a row.

 

Chande Trend Meter and Morris WOE

In Chart 2 I show the equivalent period in the $COMPQ with the Chande Trend Meter (CTM) in the lower panel.  Since the CTM is plotted on a continuous scale and day-to-day fluctuations are included, it has a traditional appearance in contrast to the binary look and feel of the WOE.  Also, though the scale is 0-100 for both indicators, the time intervals used for the underlying calculations are not identical, so that there are lags between the indicators at key turning points. However, the broad similarity between the indicators is striking.

 

Chart 2: The Chande Trend Meter in the lower panel shown over roughly the same time period as in Chart 1 using the $COMPQ.  Note that the two indicators are broadly similar, though the CTM is smoother in appearance because it includes day-to-day fluctuations.

 

In Chart 3 I tried to overlay the two indicators, manually matching the time scale as accurately as I could.  Ideally, I would have pestered Greg to give me his actual values, and I would have plotted this values directly side-by-side with the CTM.  For now, note that there is a strong similarity between the two indicators, even though the components and underlying time-periods used for the calculations are different.  The key turning points coincide in the two indicators, as they should, since the underlying closing price drives much of the computations. 

 

Chart 3: A superimposition of the Morris WOE and CTM calculated on $COMPQ data.  A careful examination shows the strong similarity between the two indicators during strong trends and at key turning points.  Note the convergence between the indicators during the strong trend in January, 2018.  During the uptrend in June, the two indicators differ a bit, since the binary nature of WOE means it returns a value of 100, whereas the CTM, which shows day-to-day fluctuations, is above 80 (see Chart 2).  The two indicators also changed direction quite close to one another during the consolidation from February through May.  The CTM followed the WOE, but did not get down as low.

 

CTM: A Work-around for the Morris WOE

One possible work-around for fans of the Greg Morris Weight Of Evidence trading model is to use the Chande Trend Meter.  Since the CTM is seamless across time, it can be plotted on monthly, weekly, daily or intra-day data to meet the trading system needs of disciplined traders.  The Green or "Strong Uptrend" region is the same for both indicators, i.e., between 80-100, simplifying the application of the CTM.  Similarly, the "Strong Downtrend" region is below 20 for both indicators.

I want to thank Greg Morris for permission to use his charts. It is important to remember that for fans of volume and market breadth, the Morris WOE is the definitive indicator, since CTM only uses prices in its construction.

 

S&P-500 Rallies to My First Target

During my appearance last week on the MWL show with Tom and Erin, the poll question was whether the S&P 500 would have a summer rally.  A majority did not think so, so I predicted that perversely, the market would indeed rally, and showed a chart of possible up-side targets.  Happily, the $SPX has reached one of my targets (see Chart 4 below).   Hopefully, the $SPX will hold above 2800 through Friday, and follow through next week, to reach the top of the up-trend channel.  As I noted in my presentation last week, the Dow and the broader NY Composite are still lagging a bit.

 

Chart 4: The $SPX has reached the first of my upside targets, defying the poll, as expected (see the roundup here).  (A live version of the chart is here).

 

Thank you for tuning in, and I hope you will check into the Greg Morris series on system development (if you haven't done so already).   I will also refer you to my book, "Beyond Technical Analysis" for another view of  system development.  You can find the CTM in the StockCharts drop-down list of indicators.

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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