Summer Reading: Deemer on Technical Analysis and a TOS Code for His Break Away Momentum Indicator

This summer, I've been reading Walter Deemer's Deemer On Technical Analysis and it has been one of the best technical analysis books that I've read in a really long time.  Mr. Deemer gives his take on using TA for longer term investors and he shy's away from the ultra short term time frames that many modern trading books focus on.  He had a long career as a technical analyst and his book is chock full incredibly interesting and witty observations based on his own experiences from his career.


Deemer  not only breaks down what he feels is useful about TA, he also does a great job of explaining his beliefs on why the TA that he uses works.  You're not going to see pictures of massive charts with multiple indicators and squiggly lines in this book..he keeps his charts to the bare minimum of what he considers useful tools.  This book will likely be the book that I recommend to people when they ask me for a good book that can help them get started with investing/trading or with TA in genearl.  If you haven't read it yet, pick it up or order it for the kindle/ipad.  It's well worth the read.

As a bonus, I coded his Breakaway Momentum indicator for think or swim.  This indicator uses the NYSE advances and declines that are added together for the trailing 10 days and then a ratio is created of advances to declines.  To be breakaway momentum, the reading has to be above a 1.97.  These readings only happen once every 31 and a half years on average.  That being said, we had three in 2009..a bit of an anomaly and a testament to how oversold the market was after the 2008 meltdown.  For more info and historical recordings of breakaway momentum check out Mr. Deemer's website here.

Here's a chart, note TOS has some data issues with advance decline numbers starting in 2009 and going backwards, however, this indicator works well with recent data and you can still see the 3 breakaway readings in 2009..there are just some holes in the data that don't look pretty.

And here is the code for you thinkorswim fans:

####Delete this line when pasting in TOS####


declare lower;

input adv = "$ADVN";
input dec = "$DECN";
input length = 10;

def up = close(adv);
def down = close(dec);

def sumup = sum(up, length);
def sumdn = sum(down, length);

plot ratio = sumup/sumdn;

plot breakaway = 1.97;

####Delete this line when pasting in TOS####


Have a great weekend!

TLT

Another Look at the New Highs Indicator

Recently, I posted about a new highs indicator that I keep track of in relation to the S&P. The conclusion of the post was that fewer and fewer new highs were an indication that the S&P would fall and that a reversal would not occur until we started seeing more new highs.

Here's an updated chart that shows the S&P vs. the TLT New Highs Multiplier.
As you can see, the new highs multiplier continues to dwindle within a very low and tight range. Does this mean that we're about to see another major drop in the markets? Not sure, but one thing I do know, we probably won't see any meaningful rallies until we start seeing a rising trend in the new high multiplier line. I'm almost tempted to take this bearish reading as a contrarian indication (especially because the public is so bearish right now) and buy a little of the S&P, just a nibble, to start building a long term position. We'll see, only time will tell.

Good luck out there.

TLT

A Look Back at the S&P with a Breadth Indicator

I've been tracking many market indicators by recording different market data over the years and one technique that has worked well is a market breadth indicator that consists of new highs that are made in the stock market. Daily, I record the new highs of several markets and then average them and multiply the numbers to get a "multiplier number" that I have used as an indicator for the broad stock market. As you can see from the chart below, the TLT New High Multiplier gave a warning signal far in advance from the major market decline of 2008. Here's a chart that compares the indicator line to the S&P etf SPY.
As you can see from the above chart, the new highs multiplier number was printing lower and lower highs between February 2007 and November 2007. This was a clear sign that something was not right. Furthermore, the new highs have stayed at much lower levels since September of 2007. What this tells me is that we will need to start seeing higher highs on the new highs multiplier index to confirm a reversal. Right now we're just moving sideways in a very bearish pattern (which could possibly mean that we're close to a bottom).

The important thing to remember when using this kind of data is that the first divergence (or signal in opposite direction) is not necessarily a valid warning signal, but recurring moves that are higher or lower can indicate that a change of trend is coming. The frustrating aspect about these types of signals is that just because the trend might be changing doesn't necessarily mean that the trend will not continue for a little while after the initial divergences. This is where technical analysis becomes more of an art than a hard science and it's up to us traders to determine when the risk/reward ratio is not worth trading because of such divergences.

The above chart clearly shows the risk of staying long long the S&P in mid to late 2008 and updating it regularly might shed some insight into when it's a good time to reverse and go long. Only time will tell...I'll make sure to post an updated chart in the future.

Good luck out there.

TLT