Letters To S&C  |  JAN 2002

Letters To S&C

BALANCE OF MARKET POWER Editor, In “Balance Of Market Power” (S&C, August 2001), author Igor Livshin constructs an oscillator based on three types of rewards. But I think it lacks one more type of reward: today’s open minus yesterday’s close; that is, overnight action on digesting news by market participants. Without this, the oscillator may interpret the situation incorrectly. Suppose the Nasdaq opened down with a gap of 100 points, then rallied from the open 50 points, and closed at the high of the day. Say the situation repeated five days in a row. Calculating the oscillator’s value based on the four intraday values (today’s open, high, low, close) will indicate a very bullish bias, when in reality the price was dropping like a stone. ANNA MOZHAEVA, via e-mail Russia Ivor Livshin replies: This suggested addition to the BMP formula would cover the after-the-market- close activity (specifically, gaps). However, I personally would not include this part in the BMP calculation for the following reasons: 1 Gaps happen relatively seldom, and their impact on multiple days’ (say, 14 days) aggregate value of the BMP indicator is minimal. I can’t ever remember seeing five gaps in a row. 2 Very often, the overnight activity is wrong and has a short-lived impact on the market direction.

by Technical Analysis, Inc.