Introduction

Market sentiment plays a critical role in assessing share price movements.

This article describes an indicator that I have developed which delivers a

consistent measurement of market sentiment using a unique

combination of indicators. I have called it the Trend Intensity Indicator.

The Trend Intensity Indicator combines and weighs four simple tools:

trend, volume,moving averages and price momentum. This generates

an invaluable benchmark that highlights only those stocks with

compelling trending qualities that offer the best prospects for

sustained price movement.

Why sentiment?

The motivation for designing an indicator evolved from a realisation

that fundamental analysis was not necessarily providing all the

answers, nor explaining many share price movements.

Price analysis is the examination of a company’s share price. At any

one point in time buyers and sellers agree on a market price, which is

a direct reflection of market sentiment and drives the share price.

Fundamental and price analysis are two entirely separate moving

targets that very often diverge, but it is movement in the share price

which we are most interested in and from which we profit.

The “sentiment” factor can drive prices far from fundamental value.

The unexpected news of the 2002 profit downgrades were dealt with

so harshly by the market that it drove prices well below their

fundamental value. By contrast, future expectations can build prices to

unrealistic levels far beyond fundamental value. This is what made the

Biotech sector such a burial ground of shattered dreams – so many

expectations. And of course, the Internet bubble was built almost

entirely on sentiment with little consideration for value at all.

Sentiment is a powerful force, and an understanding is essential to

successful stock market trading and investing. The difference between

a stock’s fundamental valuation and its share price could be explained

as the “sentiment” factor.

How do we measure sentiment?

To initiate analysis using the Trend Intensity Indicator a definition of

trend is first established. A stock, which moves in a sequence of higher

highs and higher lows, is defined as having an uptrend. At the point

that this sequence begins, i.e. when it changes from a downtrend of

lower highs and lower lows,we consider the trend reversed.

Only weekly reversals are employed in our approach. The basis for

this rule is that a weekly trend change avoids daily market noise. It is

a reliable medium term indicator and provides a clear and objective

view of market sentiment.

Once a stock fulfils a simple trend definition, our Trend Intensity

Indicator then rates the power of that trend and establishes a clear

view of market sentiment towards it, or against it.

The Trend Intensity Indicator calculates a single value from a “basket”

of sentiment indicators.

1.Trend – for direction

2. Price/volume – investor participation/non participation

3.Moving average – for averaging probabilities

4. Price momentum – to define the power of the crowd behaviour

The calculation

By taking each indicator and breaking it down to the most basic

signals, we provide a value for the state each indicator is in. For trend,

it is either up or down which then receives a negative or positive

value reflecting that state. This is then weighted into the end result,

its Trend Intensity Rating.

Of the other three indicators we ask the question: Does volume

support the rise? Where is the price in relation to its moving average?

And is price movement attracting positive crowd behaviour?

The following table shows the indicators used for calculating the Trend

Intensity Indicator and their different states. The values and

calculations that generate the Trend Intensity Rating for each stock are

proprietary to Stockradar, however, the objective rule-based approach

becomes clear with only the most reliable signals being employed.

Trend Intensity Indicator

The Trend Intensity Indicator calculation generates a stock rating

between 10 and -10. The highest value of 10 reflects a consensus

agreement by all indicators that all positive sentiment rules have

been satisfied and the stock is, therefore, rated at a maximum on the

Trend Intensity scale. The lowest value of -10 reflects consensus

agreement from all indicators that no conditions have been met that

suggest a stock has any positive sentiment towards it.

A stock that reverses its trend to up and has a Trend Intensity Rating

of 4 or greater will qualify as a Stockradar Stock Pick and, as such, will

have compelling trending qualities and offer the best prospects of

price movement. Alternatively, a stock that reverses its trend and has

a Trend Intensity Rating of -4 or less will be disqualified from

Stockradar’s Stock Picks on the grounds that it has lost its trending

qualities. This breaks the market down into two distinct groups of

stocks. One that is trending, or one that is not. Our focus is on up

trending stocks only.

MARKET TECHNICIAN Issue 48 – November 200310

The Trend Intensity IndicatorBy Richard Lie

INDICATOR STATUS

PRICE

1a. Trend Up Higher Highs and Higher Lows

1b. Trend Down Lower Lows and Lower Highs

VOLUME

2a. Volume Bullish Volume Expanding & Price Rising

2b. Corrective in up trend Volume Contracting & Price Rising

2c. Volume Bearish Volume Expanding & Price Falling

2d. Corrective in down trend Volume Contracting & Price Falling

MOVING AVERAGE (XMA)

3a. Moving Average – Positive Price > XMA

3b. Moving Average – Negative Price < XMA

3c. Moving Average – Neutral Prices closes once above/below XMA

MOVING AVERAGE CONVERGENCE

/DIVERGENCE INDICATOR (MACD)

4a. MACD – Positive MACD lines > 0,

MACD Histogram Rising and > 0

4b. MACD lines > 0,

MACD Histogram Rising and < 0

4c. MACD lines > 0,

MACD Histogram Falling and > 0

4d. MACD lines > 0,

MACD Histogram Falling and < 0

4e. MACD – Negative MACD lines < 0,

MACD Histogram Falling < 0

4f. MACD lines < 0,

MACD Histogram Falling > 0

4g. MACD lines < 0,

MACD Histogram Rising > 0

4h. MACD lines < 0,

MACD Histogram Rising < 0

Issue 48 – November 2003 MARKET TECHNICIAN 11

TREND INTENSITY INDICATOR RATING SCALE

The Result

Stockradar’s coverage is of the ASX/300. Weekly results are presented

each Monday with our recommended Stock Picks at

Stockradar.com.au. Our weekly Stock Picks are supported by a Stock

Alert facility that scans the market daily, targeting stocks that are

moving in and out of their trends. Along with specific stock analysis,

the Weekly Sector Update takes on a thorough review of a market

sector. Published bi-monthly our free newsletter features a selection

of market highlights.

Richard Lie is an independent research provider licensed by the ASIC

(Australian Securities and Investments Commission).

An interesting article by Beverley Antrobus (MT August 2003), but

unfortunately a little flawed in the logic and also in some of the “facts”

quoted. Beverley’s basic premise was that you cannot make more money

by actively trading a large move compared to the money you would make

by sitting tight for the long haul. This argument assumes that it is not

possible to identify intermediate turning points in advance and that you

have to wait for “a change in trend” before you act. This is not the case.

The concept that “profit and loss is virtually random at the short term

level” is incorrect. Markets are fractal, they are self similar and therefore

become predictable even at short time frames as well as over periods of

several years. I am also curious as to why Beverley uses W.D Gann as proof

that you should throw away your “ticker” and then describe the same

person as a “self publicising failure”.

Markets are not random and with hundreds of years of data thoroughly

tested do not appear to have ever been random. Why am I convinced that

the markets are fractal? Because using these fractal qualities, I can predict

future price movements every hour of every day in the same manner on

multiple time frames. Predicting these future price movements, including

definitive price levels in areas where no trading has existed before, is not

impossible as Beverley would have you believe. It is not easy but it is not

impossible. The truth is that “market price moves to find a new barrier at

every level of oscillation”, and that is quoting Beverley’s own article. Of

course you have to know how to find a way of predicting these levels in

advance, and that is the hard part. Beverley states that the short term

trader cannot know where these reflective barriers will appear as there is

no magic formula. The only part of this I would agree with is the fact that

it is not magic. It is just a formula and there are short term traders

effectively using these levels every day.

Beverley seems to think that technical analysis will not be serious until it can

predict all markets all of the time. When are we going to get measured on a

level playing field with the economists? They can’t always tell what has

happened accurately in the past, let alone the future. Economics, with

perhaps the exclusion of Econophysics, has nothing to do with predicting

accurate levels where markets will make significant changes in trend.

Telling me that the bond market may have changed trend after one of the

biggest one month falls in over 50 years is not helpful. Predicting the

collapse and getting short at the highs is useful, which is the level of

accuracy actually provided by technical analysis. Is it possible to trade

markets successfully purely from technical analysis with no knowledge of

economic theory or even access to news? Yes it is. Let’s take this a stage

further. It is possible to predict, from technicals alone, where a turning point

will come in a market of such magnitude that it will force commentators to

change their assessment of the underlying economic situation? Economists

tend to write the story to fit the events that they know.

Regarding Gann, Livermore and Elliott failures, does the apparent success

or failure of their personal trading matter? One of the most respected

equity analysts of the past 40 years, who made substantial sums for his

clients, couldn’t trade his own account successfully. Did that make him a

failure? Livermore took a huge punt on there not being a Second World

War and stopped himself out permanently. I can’t see that this proves

anything except that everyone needs a better money management

system than just blowing your brains out.

Gann however was not a failure. The methods worked then and work

now. Nobody, however ever said that they were easy methods. Anecdotal

evidence suggests that much of the negative information about

W.D.Gann’s “success” came from his son, with whom he appeared to have

been in some kind of dispute.

So back to Beverley’s basic conclusion that you cannot make more money

by actively trading a large move compared to the money you would make

by sitting tight for the long haul, I have looked hard at the article and

cannot find any solid evidence furthermore if Beverley is so convinced

that you cannot improve results by active trading does his own trading

strategy actually reflect this?

Malcolm Blazey F.S.T.A. Managing Director TradingSkills.Com

August 2003

LetterRATING STATUS

10 to 7 Trending up strongly

6 to 4 Trending Up

3 to -3 Neutral

-3 to -6 Trending down

-6 to -10 Trending down strongly

Society of Technical Analysts Ltd (STA)

Diploma Course

15 January – 6 April 2004

For the eighth year running, the Society of Technical Analysts Ltd (STA) Education

Committee is holding its Diploma course in Technical Analysis. This year it will be

held at London School of Economics in Aldwych.

The course is a preparation for the Diploma examination in April 2004. It consists

of 11 Thursday evenings starting on Thursday 15 January, followed by a full day

Revision Day (including Report writing), on Tuesday 6 April 2004. Evening

sessions are from 6.00pm to 9.00pm and Revision Day, which includes lunch, from

9.30am to 5.00pm. The Exam itself lasts three hours and will be held later in April

(date to be announced).

The course is expected to cover:

1. Bar charts. Gaps, islands, key reversals. Defining price objectives from gaps and

patterns on bar charts. Arithmetic versus logarithmic scales.

2. Moving averages – arithmetic, weighted, and exponential. Centred, non-

centred and advanced. Single, double and multiple moving average

crossovers. Moving envelopes, including Bollinger Bands.

3. Candle charts and candle patterns.

4. Point and figure charts. Construction, scale, box reversal, objective counting.

Advantages and disadvantages compared to other types of chart.

5. Dow Theory.

6. Chart patterns, eg. triangles, flags, pennants, diamonds, broadening patterns

(megaphones), wedges.

7. Reversal patterns and how to identify/anticipate them. Rounding tops and

bottoms, head and shoulders, spikes, double/treble/multiple tops and bottoms.

8. Trend. How to draw correct short, medium and long-term trendlines. Trend

channels. Return lines and internal trendlines. Unconventional but useful

trendlines. Acceleration. Speed lines. Trend characteristics.

9. Consolidation – how and why it occurs. Breakouts and how to recognise them.

10. Corrections: when and how far.

11. Support and resistance.The various chart points and facets that can act as such.

12. Basic elements of Gann theory.

13. Basic elements of Elliott wave theory.

14. Fibonacci series, fan lines, arcs and time zones.

15. Cycles. Amplitude, length, phase, harmonicity, synchronicity, left and right

translation. Detrending.

16. Relative performance and how to interpret relative strength charts.

17. Momentum indicators and oscillators including:

Rate of change – Welles Wilder's RSI – Stochastics (%K & D)

Moving Average Convergence Divergence (MACD) & MACD histogram

Directional Movement Indicator – Parabolics – Commodity Channel Index

18. Volume signals and indicators, including On-Balance Volume, Volume

Accumulator etc. Open interest.

19. Breadth indicators.

20. Sentiment indicators and contrary opinion.

21. Market Profile (TM).

22. Investor psychology – individual and group.

If you would like further information

please contact Katie Abberton on 07000 710207