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Article Archive For Arthur A. Merrill, C.M.T.
DownloadSidebar: Fitting a trendline by least squares by Arthur A. Merrill
ARTICLE SYNOPSIS ...Stocks & Commodities V. 22:10 (86): Sidebar: Fitting a trendline by least squares by Arthur A. Merrill Trendlines usually are drawn through tops or bottoms. They also are drawn through the center of prices by a lagged moving average or by eye. A straight line through the center of a price channel, if the scale is logarithmic, will give you the percentage growth or decline rate. If the straight line is drawn by eye, it is subject to debate. This doubt can be resolved by a mathematically calculated line called "least squares." The deviations of the points from the line are A, B, C, D and E in...
The Elapsed Time Calculator by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...The Elapsed Time Calculator by Arthur A. Merrill, C.M.T. Veteran technician Arthur Merrill explains how to derive the number of days, actual or calendar, between two dates using a simple table and some elementary steps. Do you need to know the number of calendar days between two dates? Do you need to know the number of days to the expiration of a futures contract to calculate fair value? Do you need to know the number of calendar days between two peaks or two troughs to estimate cycle length? Do you need to know the number of days between two dates to calculate interest due? If so, this tab...
The Presidential Election Cycle by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...The Presidential Election Cycle by Arthur A. Merrill, C.M.T. It's an election year again. What does history say about them ? This famous technician tells you that what you've heard about Presidential election years may very well be true. An election year is in progress. What are the prospects for the markets? We've been told that traditionally, politicians try to do everything they can to make the years with Presidential elections scheduled good ones in the market to put voters in a positive frame of mind. Does history confirm this truism? To check this out, I asked my computer to calculate...
Stock Selection by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Stock Selection by Arthur A. Merrill, C.M.T. How does a veteran technician like Arthur Merrill select stocks for investment? He explains that it's not the simplest of methods and it does require research and work, but the results, he notes, are worth it--his growth stock index started at 874 in 1965, at the level that the DJIA was back then; when the DJIA reached 3169 recently, Merrill's index hit 15,149! I have been asked how I pick stocks for investment. I have a definite preference for growth stocks -- stocks that have been delivering a consistent and rapid growth in earnings per share (EPS...
Chi Squared by Arthur A. Merrill, C.M.T
ARTICLE SYNOPSIS ...Chi Squared by Arthur A. Merrill, C.M.T. Just how meaningful are statistics? Arthur Merrill explains how to find out. If records show that market behavior exhibited more rises than declines at a certain time in the past, could it have been by chance? Yes. If a medicine produced cures more often than average, could it have been luck? If so, how meaningful is the record? To determine how meaningful a particular statistic is, statisticians set up ""confidence levels."" If the result in question could have occurred by chance once in 20 repetitions, you can have 95% confidence that the result is...
Closing Tick by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Closing Tick by Arthur A. Merrill, C.M.T. Buyers' market or sellers' market? Counting the upticks and downticks can give you a clue, Merrill says. Are buyers reaching for stock? Do they have to bid a price higher than the last price given (an uptick)? Or do sellers have to accept a lower price to get rid of their stock (a downtick)? A count of the upticks and downticks should indicate whether it's a buyers' or sellers' market. The closing tick is reported each day in the financial press. It shows, for various markets, the number of stocks whose last change in price was an increase less the n...
Moving Average Crossovers by Arthur A. Merrill, CMT
ARTICLE SYNOPSIS ...Moving Average Crossovers by Arthur A. Merrill, CMT Are moving average crossovers more effective than other indicators? More specifically, how about moving average crossovers applied to the Dow Jones Industrial Average? S&C contributor Arthur Merrill decided to research the question using weekly data for the last 24 years, checking out crossovers with a four-week exponential moving average and with 13-, 26- and 52-week exponential averages. Here are his results. One of the earliest technical tools, as easy to figure with pens and paper as well as with computer later on, was a price chart and...
Closing Arms by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Closing Arms by Arthur A. Merrill, C.M.T. The Arms index has been verified, deified, and even modified, certainly within the pages of STOCKS & COMMODITIES. Now the index is examined again, this time by noted veteran technician Arthur Merrill, to find out whether the daily closing Arms index is helpful in pointing the probable direction of the market on the following day. The index originally known as TRIN, or the short-term trading index, is now properly labeled the Arms index. (I may have been the first to suggest this change.) The index's usefulness and versatility has been discussed in se...
Price/Earnings Ratios by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Price/Earnings Ratios by Arthur A. Merrill, C.M.T. Here's a look at an old fundamental analysis favorite and what it can do for the technical analyst. For many years I have monitored the performance of a group of 30 to 50 stocks that have been exhibiting rapid and consistent growth in earnings per share. They are true growth stocks, with growth rates averaging an increase in earnings per share of more than 20% per year. To qualify for the list, the stock must be listed on the New York Stock Exchange and must have increased its earnings per share in each of the past five years. When earnings ...
Logarithmic Point & Figure by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Logarithmic Point & Figure by Arthur A. Merrill, C.M.T. In the June 1991 STOCKS & COMMODITIES, I described how a turning point could be measured by filtering out minor market moves. The same filtering technique can be used to correct the failings of the traditional point and figure (P&F) chart and upgrade it to logarithmic status. The P&F chart, built on a filtering technique, is an old favorite. In a one point chart, moves of less than one point are ignored or filtered out; in a three-point chart, all moves of less than three points are filtered out. The idea here is great, but the chart m...
Merrill MW Waves by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Merrill MW Waves by Arthur A. Merrill, C.M.T. Suppose prices have been moving in a certain way. What are the probabilities for future prices? You must look to the past for similar situations. How similar must the past situation be? If you ask your computer to search a historical database for an exact copy of a current price swing, it will have a difficult time. Suppose it succeeds in finding a duplicate situation, and you see that the market rose after the past price swing. Does this mean that now we can count on a sure rise, with 100% probability? Of course not. The evidence is insufficient...
Testing Indicators by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Testing Indicators by Arthur A. Merrill, C.M.T. Analysts consult scores of indicators to get clues for the future. At any given instant, however, some of the indicators are bullish and some are bearish. They are never unanimous. Which should we believe? Which should be given the most weight? Too often, I suspect, analysts tend to give the most weight to the indicators that happen to agree with the analysts' own convictions. If the analyst is bullish, he tends to believe the bullish indicators; if he is bearish, he likes the bearish indicators. This bias may be totally unconscious. To avoid ...
Time Of Daily High And Low by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Time Of Daily High And Low by Arthur A. Merill, C.M.T. Does the time of the high for the day and the time of the low give a clue to the performance of the market on the next day? For example, suppose that the Dow Jones Industrial Average (DJIA) high point was at the opening and the low at noon, followed by a rally in the afternoon. What are the prospects for the next day? The answer can be found by consulting the record of market highs and lows. For classification, the hours of the day could be represented by a digit. (See Figure 1.) Using a two-digit classification, the first digit could ...
How Important Is A Turning Point? by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...How Important Is A Turning Point? by Arthur A. Merrill, C.M.T. So, naturalists observe a flea Hath smaller fleas that on him prey And these have smaller still to bite 'em; And so proceed ad infinitum. --Jonathan Swift So goes the market. Waves within waves within waves. Sometimes it's difficult to see the forest; we see only the trees. The Dow theory is concerned with penetration of turning point levels. When does a turning point become important enough to set an important level? The Elliott wave theory is concerned with waves of various magnitudes. When does a turning point become impor...
The Summer Rally: Fact Or Fiction? by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...The Summer Rally: Fact Or Fiction? by Arthur A. Merrill, C.M.T. The ""summer rally"" appears in some years and is completely absent in others. Does it deserve its name? I've consulted the record back to 1885 and find that there is a good case for a bullish bias in July and August, the summer rally season. To test the theory, I divided the two months into six parts of approximately 10 days each. The years in which the market rose were counted in each 10 day period. The results are in Figure 1. The first 10-day period had the best record, rising in 69.5% of the years. That period includes the ...
Volatility by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Volatility by Arthur A. Merrill, C.M.T. Does the degree of volatility in the stock market give us any clue to the future of the market? I tested day-to-day volatility and found that it does have a good forecasting record. I took the percent change of the Dow Jones Industrial Average from the preceding day's close to the current close, and multiplied by 1,000 to get a reasonable number. All changes up or down were made positive. The changes in the week were then averaged to make the v basic index. The chart is a 33% exponential average, which is about the equivalent of a five-week average....
The 28% Rule by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...The 28% Rule by Arthur A. Merrill, C.M.T. A bear market is interrupted by rallies, which cheer the spirits but are then followed by a resumption of the bear market. Finally, one of the rallies turns out to be the first upswing of a new bull market, and prices begin to zigzag upward. Is there any characteristic of the first bull swing that differentiates it from the preceding bear market rallies? We'll know that the tide has turned after prices really start to make higher highs and higher lows, but can we get the news earlier? Yes. I've discovered that the simple magnitude of the first bull ...
Price/Dividends Ratio Revisited by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Price/Dividends Ratio Revisited by Arthur A. Merrill, C.M.T. In 1988 Merrill showed that the price/dividends ratio was useful in calling the 1987 crash. What's the outlook today? In the October 1988 issue of STOCKS & COMMODITIES, I described the usefulness of the ratio of price to dividends in calling the 1987 crash. It shouted warnings. What is the situation today? To review, Figure 1 is the long-term chart of the ratio, after filtering out all swings of the Dow Jones Industrial Average (DJIA) of less than 20%. Figure 2 brings the data up to date and includes a 10-year history. It's a quart...
Merrill Directional Patterns by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Merrill Directional Patterns by Arthur A. Merrill, C.M.T. Can we get clues to price performance from the swings of prices in the last hours of the preceding day? If we ignore volume and the amount of change, the direction of the swings of prices can be summarized by a simple plus or minus and analysis is simplified. I've modestly (!) labeled the classification ""Merrill directional patterns,"" in hopes of some immortality. If we consider the direction of the swings in the last four hours, there are 16 possible patterns (Figure 1). If we consider only the last three hours, there are eight pos...
Weekly McClellan Oscillator by Arthur A. Merrill, CMT
ARTICLE SYNOPSIS ...Weekly McClellan Oscillator by Arthur A. Merrill, CMT In the September 1989 issue of Technical Analysis of Stocks & Commodities, Richard Mogey described and interpreted the McClellan Oscillator. It's based on daily data. My data bank has been developed on a weekly basis. This article is a report on the performance of a weekly McClellan. The daily McClellan is the deviation of a 10% from a 5% exponential average of the daily number of advancing stocks minus the number declining. This is about equivalent to the deviation of a 20-day from a 40-day moving average. To change to a weekly, a 20-day...
Negative Volume Divergence Index by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Negative Volume Divergence Index by Arthur A. Merrill, C.M.T. The Market Technicians Association has selected the late Paul Dysart for their 1990 annual award ""for outstanding contribution to the field for technical analysis."" Analyst Jim Alphier, in a report supporting the award, wrote: ""The jewel in the crown of Dysart's indicators was his Negative Volume Index. It was largely--but by no means exclusively--his interpretation of this statistical series [that] allowed him to compile his unheard-of forecasting record between 1946 and 1967."" Dysart called the indicator AMOMET (""a measure of ...
Second Hour Index by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Second Hour Index by Arthur A. Merrill, C.M.T. In 1983 I noted an indicator developed by analyst Stan Weinstein: the last hour indicator. Changes in prices in the last hour seemed to be useful in forecasting the future. Having an hourly data bank extending back to 1971 plus a fine bump of curiosity, I wrote a program and checked it out. The index did indeed prove useful. My curiosity urged me on, and I checked the other hours of the day. Nothing happened until I tested the hour from 11 a.m. to noon, which, at that time, was the second hour. Here the score jumped up into the significant range....
Stocks above moving averages by Arthur A. Merrill, CMT
ARTICLE SYNOPSIS ...Stocks above moving averages by Arthur A. Merrill, CMT The percentage of stocks above their moving averages has been tracked for a number of years by Investor's Intelligence, a weekly report that includes the number of New York Stock Exchange issues above their 10-week and 30-week moving averages. How useful are these figures? I calculated the standard deviations over the past 10 years. As benchmarks, I tried two-thirds of a standard deviation above and below the mean and a full standard deviation. Using these benchmarks to determine which figures were noticeably low or high, I checked their...
Resistance by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Resistance by Arthur A. Merrill, C.M.T. Prices, like everything else move along the line of least resistance. They will do whatever comes easiest therefore they will go up if there is less resistance to an advance than to a decline and vice versa. --Edwin Lefèvre, in Reminiscences of a Stock Operator If the market has low resistance to advances and strong resistance to declines, prices move up rapidly. When resistance to the advance builds up, prices slow down and finally reverse when the resistance to advance exceeds the resistance to decline. If the market then exhibits low resistance to t...
New highs/new lows by Arthur A. Merrill, C. M. T.
ARTICLE SYNOPSIS ...New highs/new lows by Arthur A. Merrill, C. M. T. Each day the number of stocks making new highs and the number making new lows are reported in the financial press. Are these statistics useful? To find out whether they were, I constructed an index of new highs/new lows by calculating the percentage of new highs made over the preceding 10 days to the sum of new highs and new lows in the same 10 days: 100(10- day total highs) / 10- day total new highs and lows I tested the index with two sets of benchmarks: two-thirds of a standard deviation above and below the mean, and a full standard devia...
Member/Odd Lot Trading by Arthur A. Merrill, CMT
ARTICLE SYNOPSIS ...Member/Odd Lot Trading by Arthur A. Merrill, CMT Stock exchange members, the group that makes up the member trading statistics, should be more knowledgeable than the rest of us, the great ""public."" The members should be smart money -- at least, they should be smarter most of the time. In recent years, the odd lot market has been used by large operators to avoid tick change rules. Usually, though, odd lot trades represent the operations of a group not as knowledgeable as the exchange members. A comparison of the operations of smart money with those of the not-so-smart could be useful. If so,...
Fund managers' performance by Arthur Merrill, C.M.T.
ARTICLE SYNOPSIS ...Fund managers' performance by Arthur Merrill, C.M.T. Should we monitor the actions of mutual fund managers? They are paid a salary to do a better job of investing than the common man. While some managers may not live up to expectations, on the average, they should be labeled ""smart money."" The Investment Company Institute, which represents more than 90% of the funds, reports monthly. You can subscribe to their detailed report or note the ""Mutual fund monthly indicators"" summary in Barron's Index of Statistics. The indicators I will discuss in this article are derived from seven figures: ...
Volume indicators by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Volume indicators by Arthur A. Merrill, C.M.T. The activity of the market, its volume, has long been of interest to investors and traders. I have a copy of the first book on stock market technique, ABC of Stock Speculation, written by S. A. Nelson in 1903. In it, he discusses the saying, ""A dull market precedes a decline"" and the differences in bull and bear markets. Volume on a rise has always been considered good news; volume on a decline is bad news. It's an indication of the direction of enthusiasm. Is the market enthusiastic on the rises or is it enthusiastic on the declines? To mea...
Customer Option Activity by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Customer Option Activity by Arthur A. Merrill, C.M.T. The Options Clearing Corporation issues a weekly report to subscribers that lists the totals of options bought and sold on all exchanges nationwide. The transactions are segregated by customer, market makers and by firm. Technical analyst Robert Nurock developed an index of professional activity based on the buying and selling of puts and calls. I've applied his idea to the customer area. If the public (customers) are optimistic and are buying calls, the calls are being supplied to them by smart money? the professionals. This should be a ...
Secondaries by Arthur A. Merrill, CMT
ARTICLE SYNOPSIS ...Secondaries by Arthur A. Merrill, CMT If the owner of a large block wants to sell without generating a big price decline, he sometimes enlists the help of an underwriter. This type of sale is called a secondary offering. The underwriter uses his skills to dispose of the stock discretely at the best possible price. Owners of large blocks certainly watch the performance of their stock and its company. Sometimes they are on the ""inside."" They are not small operators, and they should have access to good information. Their wish to sell must have a reason: perhaps they have uncovered some bit of...
Plurality by Arthur A. Merrill, C.M.T.
ARTICLE SYNOPSIS ...Plurality by Arthur A. Merrill, C.M.T. Plurality: Now there's an indicator that has been around for at least half a century. Analyst James Alphier claims it was invented by technical analyst pioneer Paul Dysart, who published a piece on the subject at least as early as 1937. Analyst Ralph Rotnem used it early in its history, while in recent years analyst Alan Shaw has found it to be useful and gave it its name. The plurality index is based on the difference between advances and declines, regardless of sign. If advancing stocks on the New York Stock Exchange number 4,000 and declines number 3...
Volume indices by Arthur Merrill
ARTICLE SYNOPSIS ...Volume indices by Arthur Merrill The ARMS Index, in the years since Richard Arms Jr. originated and described it in the August 7, 1967 issue of Barron's, has been called MKDS by Bunker Ramo, STKS by ADP, TRIN by Quotron and the Short Term Trading Index. Market technicians, however, recommend the name ARMS Index. The index has a simple formula: ... If declining stocks are more active than advancing stocks, the index will be high and the indication bearish (Figure 1). If advancing stocks are showing the most volume, the index will be low and N the indications bullish. However, analyst John ...
Speculative indicators by Arthur Merrill
ARTICLE SYNOPSIS ...Heavy speculation is a sign of a dangerous market-- one that is riding for a fall. I believe I was the first to suggest, in a 1963 radio interview, that the volume of the American Stock Exchange (AMEX) could be used as a measure of the degree of speculation. The reason is simple. Typical stocks listed on the AMEX tend to be smaller in capitalization and more volatile in price--the type of stock preferred by a speculator who wants fast action. In recent years, the Over-the-Counter exchange has become prominent. Typical OTC stocks are even more volatile than those on the AMEX. It has been suggest...
Market letter sentiment by Arthur Merrill
ARTICLE SYNOPSIS ...Market letter sentiment by Arthur Merrill Analyst Abraham Cohen, many years ago, began to tabulate the opinions of stock market analysts. He watched scores of market letters (including my own!) and each week put them in three piles: bullish, bearish and correction. He reported the percentage in each category in his weekly publication, Investors' Intelligence. I have found it useful to divide the ""correction"" pile and assign one half of the stack to the bullish and one half to the bearish categories. Market letter writers are presumed to be experts and to have access to more data than the o...
Public/member short selling by Arthur Merrill
ARTICLE SYNOPSIS ...Public/member short selling by Arthur Merrill The statistics on shorting by professionals and by the public can be combined into revealing and successful indicators. The basic figures are published, two weeks late, in Barron's and The Wall Street Journal. The New York and American stock exchanges report total short sales and the portions of the total made up by specialists, floor traders and other members for their own account. These three subcategories can be added together to yield ""total members,"" or shorting by the smart money. Total members can be subtracted from total short sales to ...
Member Trading by Arthur A. Merrill
ARTICLE SYNOPSIS ...Member Trading by Arthur A. Merrill Once a week, but two weeks late, the New York and American stock exchanges report some interesting figures. You will find them in Barron's or The Wall Street Journal : Total volume and total short sales; Specialist purchases, sales and short sales; Floor traders purchases, sales and short sales, Odd lot purchases, sales and short sales. You can calculate the total exchange member figures by adding the specialist, floor traders and other member numbers. Deduct member data from the total and you have a figure for the non-members or public....
Large block transactions by Arthur Merrill
ARTICLE SYNOPSIS ...Large block transactions by Arthur Merrill Here is an indicator that reveals the direction of enthusiasm of the big operators. Are they reaching for stock, even at higher prices? Or, on the other hand are they eager to unload, even at lower prices? The big operators are usually the most informed traders; we should pay heed to their actions. The source data for this indicator each week is a summary table in Barron's. All big trades on the New York Stock exchange are noted, and the number of upticks, downticks and unchanged are counted and reported. The trades are separated into two categories...
Watch the Fed! by Arthur A. Merrill
ARTICLE SYNOPSIS ...Watch the Fed! by Arthur A. Merrill The actions of the Federal Reserve are vitally important to investors and speculators. When the Fed tightens the money supply, interest rates rise, bonds and stocks fall. The reverse occurs when the Fed eases the supply of money. Most of the federal policy decisions are made behind closed doors at meetings of the Federal Open Market Committee (FOMC), held in Washington eight times a year. The committee uses weekly reserve targets to determine strategies for the future. ""Fed Watchers,"" I'm sure, would like to bug the committee meetings. However, as secon...
The Wall Street Week index by Arthur A. Merrill
ARTICLE SYNOPSIS ...The Wall Street Week index by Arthur A. Merrill Every six months I have been checking the accuracy of more than 40 indicators over a span of several years. On the last test, the indicator that came out on top was the Wall Street Week Technical Market Indicator (WSW Index) reported on the Wall Street Week public television program. In the test, the scores are in the form of a batting average. Each indicator is asked each week whether it is bullish or bearish, and the number of times this opinion is right or wrong is determined by the direction of the market in the next 13 weeks, six months or...
Short Interest by Arthur A. Merrill
ARTICLE SYNOPSIS ...Short Interest by Arthur A. Merrill Short interest ? the sale of borrowed stock ? is one of the most useful tools of the technician. Short sales are made by pessimists, who expect prices to fall. If prices fall, the short seller can buy shares at a lower price and return the borrowed stock. Because short sales are made by pessimists, it would seem that a high short interest, displaying a large number of bearish investors, would be a bearish indicator. No way! A high short interest means that past sales have been made, future purchases must be made. High short interest, therefore, represents ...
Option premiums by Arthur Merrill
ARTICLE SYNOPSIS ...Option premiums by Arthur Merrill Can we derive useful information about the future direction of the stock market from option statistics? I've found one item of data that has a good prediction record--the ratio of the premium on puts to the premium on calls. (Premium is the strike price plus the cost of the option minus the current price of the underlying security.) The basic data, weekly average put and call premiums, are calculated and published by the Options Clearing Corporation, 440 LaSalle, Chicago, IL 60605, and the weekly ratio is published by Technical Trends, P.O. Box 792, Wilton, C...
Most active STOCKS by Arthur Merrill
ARTICLE SYNOPSIS ...Most active STOCKS by Arthur Merrill The 15 most active issues on the New York Stock Exchange (NYSE) are listed daily in The New York Times and The Wall Street Journal, and weekly in Barron's. Are these statistics helpful? The average price statistic can be used to measure the speculative tone of the market. A market dominated by low-priced stocks is speculative; one dominated by high-priced stocks is usually respectable. Because the market becomes speculative at the top of a swing, low values of this indicator should be found at market peaks. I use the weekly statistic reported in Barron's...
Member and public short selling by Arthur A. Merrill
ARTICLE SYNOPSIS ...Member and public short selling by Arthur A. Merrill Total short sales figures, published by the New York and American stock exchanges, are a useful set of figures for gauging market moods. Total short sales figures are reported in The Wall Street Journal and Barron's. Exchange members and non-members, or the public, make up the total short sales figures. You can calculate the total exchange member figures by adding the specialist, floor traders and other member numbers. Deduct member data from the total and you have a figure for the non-members or public. Some analysts report ""members tot...
Advance-decline divergence as an oscillator by Arthur A. Merrill
ARTICLE SYNOPSIS ...Advance-decline divergence as an oscillator by Arthur A. Merrill Which indicators signaled the crash last October? One that had been shouting a warning was A-D Divergence. This is one of our most venerable indicators. The Advance-Decline Divergence Oscillator (ADDO) is a recent refinement. A-D, advance minus decline, was first suggested by Col. Leonard Ayers of the Cleveland Trust Company in 1926. He was searching for a way to locate buying and selling climaxes. The indicator is a simple cumulation of the difference between the number of stocks advancing or declining in a day. This indicato...
Price/dividends ratio by Arthur Merrill
ARTICLE SYNOPSIS ...Price/dividends ratio by Arthur Merrill An indicator that was shouting warnings before the stock market crash last year was the price/dividends ratio. This indicator is a measure of expensiveness. It reports the current price of enough stock to yield $1 in dividends. It's the inverse of stock yield. Note Figure 1 which is based on the Dow Jones Industrial Average (DJIA). All price swings of less than 20% have been ignored, or filtered out. The price/dividends ratio was then calculated at each price turning point by dividing the DJIA by the dividends in the preceding four quarters. The chart ...
Cycles by Arthur Merrill
ARTICLE SYNOPSIS ...Cycles by Arthur Merrill The market certainly moves in waves. Is there regularity in these cyclical waves that can give us useful clues to the future? Any curve can be approximated by adding together a number of sine waves, each with a different period and amplitude (Figure 1). The component curves can be calculated by Fourier analysis. In one study made by Gertrude Shirk of the Foundation for the Study of Cycles, the most important underlying cycles ranked by amplitude at the crest were: All of these cycles, with the exception of the 46-year cycle, were found to have statistical significa...
Trend detection by Arthur Merrill
ARTICLE SYNOPSIS ...Trend detection by Arthur Merrill The trend of prices is itself an indicator of the future, since trends tend to continue. In a bull market, the major trend is upward. Since most stocks ride with the trend, it's a good idea to buy and hold stocks in a bull market. The reverse is true in a bear market. But the movement in a bull or bear market certainly isn't a straight line. There are secondary reactions in bull markets when the intermediate trend is downward. There are rallies in bear markets when the intermediate trend is rising. Within these intermediate trends there are minor reversals, ...
Reading indicator charts by Arthur A. Merrill
ARTICLE SYNOPSIS ...Reading indicator charts by Arthur A. Merrill In the preceding column, I discussed the smoothing of indicator data. When you have tamed the wild fluctuations, how do you translate the result into a forecast? How do you read the chart? There are several possible interpretations. A method that works well with one indicator may not be the best for another. The selection of the method is usually made by common sense and trial and error. We'll look at five of the most common and useful. Unusually high or low For most indicators, I assume that the indicator is trying to tell me something when it...
More trend detection by Arthur A. Merrill
ARTICLE SYNOPSIS ...More trend detection by Arthur A. Merill Last month I described four methods of trend detection: eyeball, filtered waves, zigzags and support/resistance levels. Here are seven more: Moving average This indicator is rather limited when you consider the construction of a moving average. For a new point on a ten-week average, for example, you add the current data unit to the total of the past ten weeks, then subtract the data unit that was added eleven weeks in the past, and divide by 10. You can see that the trend is entirely dependent on the difference between the current data and the data e...
Fitting a trendline by least squares by Arthur A. Merrill
ARTICLE SYNOPSIS ...Fitting a trendline by least squares by Arthur A. Merrill Trendlines usually are drawn through tops or bottoms. They also are drawn through the center of prices by a lagged moving average or by eye (Figure 1). A straight line through the center of a price channel, if the scale is logarithmic, will give you the percentage growth or decline rate. If the straight line is drawn by eye, it is subject to debate. This doubt can be resolved by a mathematically calculated line called ""least squares"" (Figure 2). The deviations of the points from the line are A, B, C, D and E. The line produced by th...
Introductions by Arthur A. Merrill
ARTICLE SYNOPSIS ...Introductions by Arthur A. Merrill Stocks tend to fly together, rising in bull markets and declining in bear markets. For this reason, analysts have been searching many years for indicators of the future of the overall stock market. It isn't easy to find a leader for the market, since the stock market itself is a leading indicator of the future of business. An indicator of stock prices is an indicator of an indicator, or an indicator of the second degree. Unlike the research of the alchemists, though, analysts have been successful in finding many stock indicators. Some of their findings are...
Taming the indicators by Arthur A. Merrill
ARTICLE SYNOPSIS ...Taming the indicators by Arthur A. Merrill An indicator is often difficult to read because of its wild fluctuations. It may appear optimistic and then dive into bearish territory. Then it might reverse again and turn bullish. Frustrating! A wild indicator is usually tamed by a moving average or an exponential average. These techniques ""smooth"" the data for us. The most common smoothing method is a simple moving average. This method is easily described by an example: a five-week average is the average of the last five weekly data points. In the following week, a new average is calculated b...
Swing Expectations by Arthur A. Merrill
ARTICLE SYNOPSIS ...Swing Expectations by Arthur A. Merrill Market moves are plagued by the ""noise"" of short-term vibrations. I've found it useful to clean up the moves by using a simple 5% filter for the market averages and a 10% filter for individual stocks. All swings of less than the specified percentage are ignored as in Figure 1, which charts recent moves of the Dow Jones Industrial Average (DJIA). This chart is quite similar to the point-and-figure method, which also ignores all moves of less than a specified number of points. To make the filter apply equally to rising and declining moves, 100% is alwa...
Computing curved trendlines by Arthur Merrill
ARTICLE SYNOPSIS ...Computing curved trendlines by Arthur Merrill Data sometimes shows a tendency to level off with a downward curve. A curved trendline, in these cases, would be more useful than a straight line. Quite often, the data rises more and more rapidly, like a skyrocket. If this is the case, a curved trendline would be more useful than a straight line. The upward curving tendency may be caused by the distortion of the arithmetic scale, which makes a given percent increase appear large at the top of a chart and small at the bottom. This distortion can be cured by using a logarithmic scale and then a s...
Consensus indicators by Arthur A. Merrill
ARTICLE SYNOPSIS ...Consensus indicators by Arthur A. Merrill There are scores of indicators and, at the same moment, some present an optimistic picture of the future while others are predicting trouble. Which indicator should be watched most carefully? When two indicators disagree, which one is the most likely to be right? How can you gauge the past performance of indicators? Can it be put into numerical form to simplify comparison? Can indicators be combined into a consensus or model? Market analysts usually consult the same battery of indicators but their conclusions are often quite different. I exchange my...
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