MailBag Blog Archives

June 2011

How Can I measure the Yield Curve?

The Yield Curve can be measured two different ways at First, chartists can use the Dynamic Yield Curve tool see the current yield curve. Users can also animate the yield curve to see how it changes over time or click on the S&P 500 chart to see the yield curve at a specific point in time. The chart below shows a flat yield curve in early July 2007, four years ago. This flat yield curve preceded the 2007 and 2008 bear market.

Click this image for a live chart

The yield curve typically reflects the difference between short-term interest rates and long-term interest rates. A normal yield curve has a positive slope where interest rates are higher as you go out the curve. The 3-month T-Bill Yield ($IRX) would be the lowest and rates would increase as the maturity extends (1,2,5,7,10,20 and 30 years). A flat yield curve forms when interest rates at the short end are virtually equal to rates at the long end, such as July 2007. An inverted yield curve occurs when rates at the short end are longer than rates at the long end. A normal yield curve is generally bullish for stocks, while a flat yield curve can lead to trouble and an inverted yield curve is considered bearish. The chart below shows the current yield curve, which is normal with a positive slope.

Click this image for a live chart

How can I add indicators to P&F charts? users can add four different chart overlays to their P&F charts. Using the Graphical P&F chart, which is the default, simply scroll to “Chart Overlays” section just below actual chart. Users can add up to three indicators (Trendlines, Bollinger Bands, Simple Moving Average and Price-by-Volume).


Keep in mind that P&F indicators are calculated a little differently. For example, a 10 period simple moving average would be based on the average column length for the last 10 columns. Instead of a daily or weekly close, the mid point of each column is used to calculate the moving average.

Click this image for a live chart.

The chart above shows the Nasdaq 100 ETF (QQQ) based on 20 cents per box with a 50 period simple moving average. Notice that the ETF broke the moving average and the trendline with the June decline. The new red trendline and moving average now become the first resistance levels to watch.

Why do the Accumulation Distribution Line and On Balance Volume sometimes diverge?

Both the Accumulation Distribution Line and On Balance Volume (OBV) are volume-based indicators designed to measure the balance of power between buying pressure and selling pressure. These indicators can move different ways because they are calculated differently.

Let’s start with OBV, which is the simpler of the two. OBV is a cumulative indicator that adds a period’s volume when the close is higher and subtracts volume when the close is lower. On a daily basis, a down day on high volume will push OBV lower, while an up day on high volume will push OBV higher.

The chart below shows Genuine Parts (GPC) with open-high-low close bars, volume and the two indicators. Up closes are black and down closes are red. Notice how the stock declined on high volume from late February to June. There are dozens of red volume bars that exceeded the 200-day SMA of volume. These high-volume declines pushed OBV (red line) lower over the last few months.


Even though OBV moved lower, the Accumulation Distribution Line moved higher because this indicator is not concerned with the close from one period to the next. Instead, the Accumulation Distribution Line is based on the level of the close relative to the high-low range for the period. A volume multiplier is created based on this relationship. The volume multiplier is +1 when the close is on the high of the day, -1 when the close is on the low and 0 when the close is in the exact middle. A close in the upper half of the period’s range yields a positive number between 0 and +1, while a close in the lower half yields a negative number between 0 and -1. Volume is then multiplied by this number to create each period’s Accumulation Distribution value. The Accumulation Distribution Line rises when the value is positive and falls when the value is negative.

One indicator is not necessarily better than the other. Because these two indicators are calculated differently, chartists can use both to confirm or refute one another. Strength in both would show clear signs of buying pressure. Weakness in both would show clear signs of selling pressure. You can read more on On Balance Volume (OBV) and the Accumulation Distribution Line in our ChartSchool.

What is a continuous futures contract?

A continuous futures contract is not really a futures contract. Instead, it is several futures contracts that have been spliced together to create a long-term chart. There is often a data adjustment involved in this splicing to eliminate gaps and create a smooth price series. These gaps stem from the time premium between futures contracts. The June gold futures contract on the CME will expire on June 28th. At this time, the July contract will become the nearest month and the July contract will expire on July 27th, one month later. The next month will always have one more month time premium. Because time is money, there will be a price difference to take this time premium into account. This means there will be a price gap between the expiring futures contract and the next futures contract. A continuous futures contract adjusts for these gaps and time differences to create an artificial price series.

Click this image to see a live chart.

Not all futures have consecutive monthly contracts. Some, such as 30-Year Treasury Bond futures, skip months with only four contracts per year (March, June, September, December). The bigger the time gap, the bigger the time premium.

Click this image for a live chart.

So what are continuous futures prices good for anywhere? Even traders want to get an idea of the long-term trend. Monthly or quarterly Futures contracts have limited lives, which makes it impossible to gauge the long-term trend. Continuous futures contracts provide a good means to assess the long-term trend. Traders can apply moving averages and do basic trend analysis. In fact, these charts work best with at least one year of data.

Why Two Different NYSE Volume Numbers?

Q: Why is the volume number for $NYA (the NYSE Composite Index) significantly higher than the value of $NYTV, the "NYSE Primary Market Volume" Index.  By the way, the $NYTV appears to match the value for NYSE volume provided by the Wall Street Journal but I can't find the $NYA value anywhere.  - Ira H.

A: It turns out the term "NYSE" has two different meanings - something that many people are unaware of.  Unfortunately, different publications and sources mix up the two meanings frequently which causes confusion.  Here's the distinction:

The term "New York Stock Exchange" (or "NYSE") by itself generally refers to the "NYSE Primary Market" - i.e., the trading floor of the NYSE building down on Wall Street (and its associated computers).  On the other hand, the term "NYSE Composite" refers to all of the exchanges throughout the US on which NYSE listed stocks are traded.

What's that?  You didn't know that NYSE-listed stocks could be traded on other exchanges?  Well, it's true and these days that is where the majority of NYSE-listed stocks actually trade.  A good example of that is the BATS exchange which provides us with free real-time data based on those kind of trades.

Anyway, the smaller "NYSE Volume" number (~900 million recently) is the NYSE Primary Market Volume number which is reported by the Wall Street Journal (and by us as $NYTV).  The larger number (~4.0 billion presently) is the "NYSE Composite Volume" and is reported on the site, Yahoo Finance, Bloomberg, and elsewhere.

That is the number that we use at the bottom of our "NYSE Composite Index" chart ($NYA).

The good news is that the charts of both numbers look almost identical - both volume numbers rise and fall at almost the exact same rate with similar spikes and drops, etc.

MACD Without the Histogram?

Q: Steve F. writes in:

"Is there a way to separate the MACD lines form the histogram to get a clearer picture?"

A: Yes there is.  There are three things you can do depending on your needs:

  1. If you just want to see the histogram and not the other lines, choose "MACD Histogram" from the Indicators dropdown instead of MACD.
  2. If you just want to see the MACD Line, only enter 2 parameters in the Parameters box.  Leave off the third one.
  3. If you are a member and you want both the MACD Line and the signal line, only enter 2 parameters in the Parameters box (like with #2) but then use the "Overlays" dropdown (in the "Advanced Options" area) to add back the 9 period EMA.

Here's a chart that shows all three possibilities:

Click on the chart to see a live version.


Resizing, Copying and Sharing PerfCharts and Market Carpets

PerfCharts and Market Carpets can be resized by clicking the “detach” icon in the lower left corner. The PerfChart below is the full version that is attached to the main browser window.

Click image for a live PerfChart.

After detaching, users can move the mouse to the corners to resize. Click, hold the click and drag the corner when the “double arrow” icon appears. This chart can also be copied by pressing ALT key and PrtScn (print screen) key at the same time. Once copied, users can then paste it into a graphics program, MS Word or into an Email for sharing.

 Click image for a live PerfChart.

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