MailBag Blog Archives

July 2011

Why is StochRSI so Volatile and What does it Measure?

StochRSI is volatile because it is an indicator of an indicator. Most indicators are derived directly from price. StochRSI is derived directly from RSI values, which are derived from price. This means StochRSI is two steps removed from the actual price. This is also known as the second derivative. Using the Nasdaq 100 ETF (QQQ) as an example, 14-day StochRSI would be 14-day Slow Stochastics applied to 14-day RSI for QQQ.

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Developed by Tushard Chande and Stanley Kroll, StochRSI was designed to increase sensitivity and signals from RSI. And it does. The chart above shows RSI fluctuating between 30 and 70 the last five months. There was one brief blip above 70 in mid February. StochRSI, on the other hand, gyrates between zero and one on a regular basis. A move to 1 indicates that RSI is at a 14-day high, while a move to 0 indicates that RSI is at a 14-day low. StochRSI is used to anticipate breakouts and surges in RSI, which in turn is used to anticipate turns in QQQ. You can read more on StochRSI in our ChartSchool.

What is the Chaikin Oscillator?

Invented by Marc Chaikin, the Chaikin Oscillator is an indicator of an indicator. In particular, it measures the momentum of the Accumulation Distribution Line, which is also a Chaikin indicator. The Chaikin Oscillator (3,10) shows the difference between the 3-day EMA of the Accumulation Distribution Line and the 10-day EMA of the Accumulation Distribution Line. The Chaikin Oscillator is positive when the 3-day EMA is above the 10-day EMA and negative when the 3-day EMA is below the 10-day EMA.

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The chart above shows Microsoft (MSFT) with the Chaikin Oscillator and Accumulation Distribution Line. As a momentum indicator, the Chaikin Oscillator is designed to lead the Accumulation Distribution Line, and it does. Notice how the oscillator turned down ahead of the Accumulation Distribution Line in January and moved into negative territory at the end of the month (1). The oscillator turned up in March and moved into positive territory in mid April (2). There was another downturn in late April and move into negative territory by mid May (3). And finally, the oscillator bottomed ahead of the Accumulation Distribution Line in early June and turned positive the third week of June (4). Signals 1 and 4 were quite good, while signals 2 and 3 resulted in whipsaws. You can read more about these indicators in our ChartSchool (click here).

What is the difference between a bar chart Double Top and a P&F Double Top?

A bar chart Double Top is a bearish reversal pattern, while a P&F Double Top is a bullish breakout pattern. Attaching the word “breakout” to the P&F version helps reduce confusion.

A Double Top Breakout is the most common bullish pattern in the P&F world. Its counter part, the Double Bottom Breakdown is the most common bearish pattern. P&F charts are drawn with rising X-Columns and falling O-Columns. An X-Column that exceeds a prior X-Column triggers a Double Top Breakout. The example below shows Diamond Offshore (DO) with several Double Top Breakouts.

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The Double Top on a bar chart is a bearish reversal pattern. Two relatively equal highs form to mark a clear resistance level within an uptrend. A reaction low forms between these two highs to mark support. Technically, the trend has not yet reversed and the Double Top is not confirmed until there is a clear support break. The chart below shows Lockheed Martin (LMT) with a potentially bearish Double Top reversal in March-May last year. The stock confirmed this pattern with a support break and broken support turned into resistance in June.

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See our ChartSchool articles for more on P&F charting and bar chart patterns.

What is a Selling Climax?

A Selling Climax is a high volume decline that is suddenly reversed. Candlesticks are especially helpful for identifying a selling climax. In particular, chartists should be on the look out for high volume Hammers, Bullish Engulfing patterns and Piercing Lines. Before looking for such patterns, remember that the security should be in a clear downtrend with the current move being down, usually sharply down. A Hammer is a signal candlestick pattern with a long lower shadow and a small body near the top of the range. This patterns shows that sellers pushed the stock sharply lower during the day, but buyers reasserted control to force a strong close. High volume reinforces this pattern. The chart below shows Rowan Companies (RDC) with a high volume hammer at the beginning of July 2010 and follow through the next day.

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Bullish Engulfing patterns and Piercing Patterns are a lot like Hammers. In fact, blending the two candlesticks from these patterns often results in a Hammer. Two candlesticks can be merged into one by taking the open of the first and the close of the second. The highest high and the lowest low of the two are then used for the high-low range. The image below shows two examples of blending candlesticks


The chart below shows Citrix Systems (CTXS) with a high volume Piercing Line at the end of January 2011. Notice that volume was very high on both days, which reinforces the reversal pattern. CTXS broke resistance two weeks later.

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