Last week, I proposed last week that applying technical analysis tools to a study of the NYSE A/D line helps traders predict where SPX prices might go. The previous article displayed examples of trendline and channel support and resistance. My favorite technical analysis tool, however, is the nested Keltner channels that I employ for stocks and indices, too. Examples of those were included in the last article, too. The moves in the A/D line were correlated with moves in the SPX to show why it's important to know when the A/D line was going to move and how far it was likely to move. If you missed last week's article and want to catch up, you can find it at this link.
The next few Trader's Corner articles will demonstrate how much information nested Keltner channels can show about the A/D line. Knowing something about what's going to happen with the NYSE A/D line enables traders to better predict what's going to happen with SPX prices.
Maybe you're tempted to stop reading because of your unfamiliarity with Keltner channels. Perhaps your charting program doesn't provide them or doesn't allow their parameters to be changed so that you can nest several on the same chart.
Don't stop reading. It's possible that you might be able to employ some of the same tactics by nesting other types of channels, such as Bollinger bands. Although Keltner channels offer some important differences, the process of determining when a move is likely to reverse is similar. Read these articles and experiment with the types of channels or bands with which you're familiar and your charting program provides.
Before delving into the Keltner channels, it's appropriate to discuss what chart interval works best. The A/D line might be strongly negative or strongly positive, but the NYSE version is still going to be bound by the number of issues trading on the NYSE. The A/D line is not going to continue to climb over a year or even a month, as it has those boundaries. That makes a study of a daily or weekly chart less helpful in most cases than an intraday chart.
Annotated Daily Chart of the A/D Line:
Unless this interesting but still anecdotal observation turns out to merit further attention, short-term charts appear more helpful when studying the A/D line, with the 15-minute or 30-minute charts often the chart intervals I choose. I also occasionally watch the 7-minute chart, but for most times, the 15-minute chart is my chart of preference for the A/D line. It's on that chart interval that other characteristics such a trendline support and resistance also can be found.
Annotated 15-Minute Chart of the A/D line:
If we're looking at Keltner charts rather than traditional studies such as trendlines, where would one look for resistance or support?
Let's look at some examples. The first consideration to be discussed is the setup for the Keltner channels. I nest three together. Each is based on a central moving average, an exponential moving average. The first is based on a 9-ema, with a multiple of 1.4 to set the channel lines. The second is based on a 45-ema with a multiple of 3, and the third, at 120-ema with a multiple of 7.2.
These settings aren't magic or set in stone. Experiment. Perhaps you'll decide that for the security you trade most often, a 10-ema, 50-ema and 100-ema work best.
For legibility reasons, you'll have to make some decisions about the colors and line widths you'll use. Otherwise you'll be staring at charts with spider webs cast across them. The most important lines are the 120-ema, the 9-ema, and the outer boundaries of the 45-ema and 120-ema channels. I employ different colors for each channel, but do use the same color for each channel's upper and lower boundaries. I thicken each channel's outer boundary lines. I also thicken the 120-ema. Find what works best for you.
On the chart below, I've included only the lines I routinely thicken.
Annotated 15-Minute Chart of the A/D line:
When the A/D line lost support at the outer channel line, the SPX began its long descent into the 3/10 low of 1272.76. First, however, it dropped through black-channel support and rose to test it, finding resistance at that line on 15-minute closes.
This brings up an important point about Keltner support or resistance. When determining whether support or resistance is holding for the A/D line, wait until the end of the 15-minute period or whatever the period is on the time interval being watched. That support or resistance is sometimes pierced during the chart interval being studied, but often the support or resistance holds on the close of that period.
Price action and A/D action have been more volatile in recent weeks, so the adherence to Keltner or any other support/resistance lines isn't as clean. In addition, the A/D line always tends to overrun support or resistance a bit since the numbers on the line are so large and change so quickly. Still, the climb underneath the black-channel resistance on the afternoon of 3/5 illustrates a period when Keltner resistance was holding even though the A/D values were climbing. Something seemed to be wrong since the resistance kept holding. The next morning, the A/D line was to gap beneath its 120-ema. So were SPX prices.
It should be obvious by now how Keltner support or resistance is found. It's located at the channel lines. It's found at both Keltner outer channel lines and central basis lines. It's determined upon the close of the interval being studied, such as a 15-minute period.
Not all potential Keltner support or resistance is created equally, however. Those most important lines mentioned earlier--the 9-ema, 120-ema, and the outer channel boundaries of the two widest channels--tend to be most important. Each has separate uses and characteristics. The chart below isolates the 9-ema.
Annotated 30-Minute Chart of the A/D Line:
In calmer and less volatile times, the channel based on the 45-ema usually contains most values, but in these times, it's the wider channel based on the 120-ema. On the chart below, I've hidden all channel lines except that widest channel's outer boundaries and central basis line.
Annotated 15-Minute Chart of the A/D Line:
If outer channel boundaries and the 120-ema prove the most important to watch, why include the full component of Keltner channel lines? Why turn a chart into a spider web of lines?
Oh, but that's where it gets interesting. We'll look at some charts showing all
the Keltner channel lines I use next week.