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Martin Zweig put out a book in 1986 called "Winning on Wall Street". It
presents a good, well documented, introduction to technical analysis from a
statistical and market point of view. In other words, it focuses more on
markets and averages than on candlesticks and price patterns.
A couple of indicators he presents seem particularly pertinent at this time.
First, he analyzes the ratio of advancing volume to declining volume and
its predictive value. He found that "when 90 percent or more of the volume
is on the upside on a given day, it is a significant sign of positive
momentum". Zwieg goes on to say, "Every bull market in history, and many
good intermediate advances have been launched with a buying stampede that
included one or more 9 to 1 up days". The volume on the Nasdaq on January 3
was 2,898,963 advancing to 213,592 declining which equates to over 13 to 1
advancing to declining volume. Breadth on the NYSE was not nearly so
positive and a ratio of only 2.5 to 1 resulted.
The second indicator Zweig presents that seems especially pertinent here is
his Fed Indicator. This indicator is calculated by awarding or deducting
points every time the Fed lowers or raises the discount rate. Points are
also added or subtracted based on the length of time since a give discount
rate change and based on a reversal in the direction of changes. The points
associated with a given interest rate change are dropped from the
calculation after six months and Zweig considers them stale. Zweig's book
states that the indicator will normally range from -4 or -5 to + 6 or +7.
A reversal in the direction of discount rate changes wipes out any positive
or negative points and a cut, as occurred on January 3, kicks in 2 positive
points. Zweig classifies levels of +2 and above as "extremely bullish" and
states that "there is no 'moderately bullish' rating simply because ratings
of +2 led to excellent stock market performance".
I have found "Winning on Wall Street" to be a good resource and a bargain at
15 dollars. Vic Sparando's book "Trader Vic; Methods of a Wall Street
Master" has also proven to be valuable. He details a technique for
identifying trend reversals and thus buying or selling opportunities.
According to this technique, a trend line is drawn from the recent high so
that it just touches the lower high that occurs immediately before the most
recent lowest low. A trend reversal is indicated when the price violates
the trendline and then moves back to test the low before the trendline
violation. The reversal is confirmed when prices move back above the high
that was put in when the trendline was violated. A chart that illustrates
what might be a trend reveral in ORCL is attached for reference. Note also
that an enfulging, bullish candlestick was put in on January 3. Paging
through the top 50 Nasdaq stocks by capitalization yields the follwing list
of stocks that appear to be reversing their downtrends. Presumably these
are among the strongest stocks on the Nasdaq because they are furthest along
in their reversals.
ORCL, QCOM, NTAP, CHKP, TLAB, BEAS.
FITB also looks interesting as a retracement from a breakout.
Those of you who have read my previous posts know my advice is worth exactly
what you pay for it. In other words, be very careful and perform your own
analysis.
Dan
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