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Trader's Corner

Think Again

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You wake to find that futures trade higher in the pre-market session. European markets post gains after six days of losses. The previous day of trading, the OEX pierced the 200-sma and the support of a rising regression channel in place since late April, but then bounced back above both by the close. It was time for day traders to try a long play.

Think again. On the day in question, August 19, adept scalpers could have benefited from a long play all right. They were the only day traders who could have profited. Ultimately, the OEX ended the day below its opening level.

Annotated Daily Chart of the OEX:

In this instance, traders might have been forewarned to take that quick profit at the 50-sma. The previous two days, tests of the 50-sma had seen pullbacks. However, traders didn't have to rely on this historical behavior alone. Another indicator would have warned that gains might not be sustainable, even in the absence of that recent OEX behavior.

Annotated 30-Minute Chart of the ADVDEC Values:

Those examining this chart could draw the conclusion that an obvious connection exists between the swing highs and lows in the advdec values and this particular Keltner channel's boundaries. The advdec values may not always turn exactly on this Keltner channel's boundaries, but the relationship exists. The Keltner settings for this channel are at a length of 45, a multiplier of 3, and exponential AvgHLC.

At the open on Friday, August 19, traders watching the advdec values on this Keltner chart would have known approximately the point at which those values would have begun reaching extreme levels for that particular move. They might then expect the advdec values to begin either a sideways movement or a pullback.

Would a stalling in the advdec values result in a direct reaction in equities? Anecdotally at least, there appears to be a congruence. The broad-based Wilshire 5000 might be used to study some examples of such congruencies.

Annotated 30-Minute Chart of the Wilshire 5000:

In this instance, and in many others studied over the last four weeks, the congruence often plays out. This happens although indices might not appear to be at similar extreme levels as measured on the same Keltner chart setting.

Annotated 30-Minute Chart of the Wilshire 5000:

A technician might conclude that although the Wilshire 5000's chart did not show that index to be overbought according to this Keltner channel basis, the advdec value did appear to be extreme, and so any index early index gains might not be sustainable.

The theory this trader has developed is that technicians can use a Keltner-based measure of extreme advdec values to predict when a short-term equity move might be topping or bottoming. Other recent anecdotal evidence supports this theory. Even for a cursory and anecdotal look, it's important to study times when markets are trending and when they're range-bound, to see whether the theory holds up in both instances. The previous example related to a day when markets had been range-bound.

Beginning about July 7, many indices began a new leg up in their rallies off April lows. They began trending.

Annotated Daily Chart of the Wilshire 5000:

Because countertrend signals prove most suspect during a trending move, it might be important to look at an instance the advdec values were hitting the upper Keltner boundary during that bounce. That's when a pullback or sideways trend in the advdec values would have looked likely. The theory being tested here then would have signaled a countertrend move.

Annotated 30-Minute Chart of ADVDEC Values:

Annotated 30-Minute Chart of the Wilshire 5000:

These few examples certainly do not prove a theory, but they do prove intriguing. At least anecdotally, being able to identify an extreme level on advdec values helps day traders determine when a short-term move might be topping or bottoming. In this trader's recent studies, the Keltner channel depicted here, as seen on a 30-minute chart, proves most helpful in determining those times when extremes might have been reached in short-term moves. At times, nesting Keltner channels of different lengths, one within the other, proves helpful for fine-tuning impressions about the advdec values.

Annotated 15-Minute Chart of the ADVDEC Values:

On this chart, three Keltner channels and their basis lines are all included. The parameters for the channels all use AvgHLC values and are exponential. The smallest channel (blue on this chart) uses a length of 9 and a multiplier of 1.4, the middle-sized one (black) uses a length of 45 and a multiplier of 3, and the largest (purple) uses a length of 120 and a multiplier of 7.2. As you can see, the central basis line of the largest chart, the gold line, sometimes does serve as support or resistance for advdec values. Places where Keltner lines converge also sometimes serve as support or resistance.

Previous TradersCorner articles discussed using Keltner lines in more depth, but with the advdec values, it may be best to concentrate on the outer boundaries of the channels. The convergence of basis lines may prove less helpful than they do on equity charts.

While evidence remains anecdotal, that evidence supports the use of Keltner channels to determine when the advdec values may have topped or bottomed. Since this evidence remains anecdotal only, it should not be used as a buy or sell signal, but rather as one tool among many in the day trader's kit. It offers a warning only to watch for other signs of a potential slowing of momentum or actual reversal, but a powerful warning. Also, because of the nature of the advdec values, this tool proves helpful only for day trades or occasionally for swing trades of one to three days, but not for position trades. A daily chart of the advdec values would provide little information of use.

The next time you think that traditional technical analysis suggests a move in a certain direction, think again. Check the Keltner-based measurements of the advdec values. You might think differently after you do.

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