Sectors, Industry Groups, ETF’s, Indexes
The Prudent Trader Trading Reports provides a plethora of information organized to conveniently search for the criteria that is important to YOU. This section will be in a constant state of flux depending upon subscriber input as to what is important to them and what is not, so please feel free to let us know. These reports if used properly will be a tremendous aid in helping you determine what is going on underneath the surface of major index activity. Where the money if flowing!
- Relative Strength Tables – Column Explanations
- Member Submitted System -> Using Relative Strength Readings for Stock and Index Selection
- Technical Indicator Tables – Column Explanations
- Prudent Trader Momentum
- Prudent Trader Accumulation/Distribution Model
- Welles Wilders Average Directional Index (ADX)
- Welles Wilders Directional Movement (DM)
- Parabolic SAR
- Return (RTN)
- New Additions
Relative Strength Tables
1) Sym -> Symbol of the ETF, Index, or Group. These symbols are stockcharts.com symbols allowing us to link to their charts. I know many of you are TC2000 users the symbols are the same in TC2000 except for the indices where they are similar.
2) Name -> Full Name of the respective ETF, Index, or Group.
3) Close -> Today’s closing price.
4) Chg –> Today’s closing price minus previous trading day’s closing price.
5) (YTD) Year-To-Date % Chg -> Today’s closing price minus the closing price at the end of last year expressed as a percentage. Note: If this cell is blank (in the case of some ETFs) then that ETF began trading this year.Columns 6 thru 11 was brought to our attention by a member using the moniker of Waveslider. This data is also available on site for each stock in our database. Utilizing the search for stocks within industry groups feature. Here is how he uses these columns to make money in the markets.
Using Relative Strength Readings for Stock and Index Selection
October 2005 by Waveslider
Editors Note: At the time this was written we were publishing the Relative Strength in relation to a moving average. Experimentation has shown that the linear regression line of relative strength to be a superior indicator to a moving average. Where you see the relationship to the moving average in the below dissertation, just substitute linear regression.
Whether you trade mechanically or discretionarily, if you are a small time trader or investor you are often riding the coattails of the big players. It is no secret that mutual funds, brokerage firms and large shareholders have the ability to move markets. In order for “the rest of us” to carve out some profit, we depend on fundamental and/or technical data to direct us to opportunities. The purpose of this article is to demonstrate one method of locating where the major players are putting their money, and thus increase the odds not only for a profitable trade, but for a potentially larger than average trade.
Are you smarter than the pros? You may be, but unless you have the information the pros have, they will likely run you over. Simple truth is that unless you have some type of inside information, you don’t have the information the pros do. On the bright side, the big players leave tracks – you just have to know how to be a tracker. Using relative strength readings (comparing inter-market relationships) is a very powerful method. Being aware of these readings is likely more valuable than most, if not all technical tools that analyze price and volume. This is the tool to use to track the big players.
In the context of this article, relative strength refers to the relationship between two price sequences. It has nothing to do with RSI (Relative Strength Index), a technical tool developed by Welles Wilder many years ago. To calculate relative strength is as easy as dividing the price of the secondary market, or group, or stock by the price of the primary market. If the line is rising, the secondary market (stock, group, ETF) is outperforming and vice versa.
The method I am going to demonstrate is a top-down method for selecting stocks, ETFs, indices, whatever. In order to keep this discussion easy I will address all trades from the long side, although the method works equally well in either direction. You’ve heard of the saying “the rising tide floats all boats”? It’s true of the markets, and this method places the trader/investor in the indices and stocks that are the strongest, with the idea that since there is massive accumulation in these areas, the prices will likely continue higher.
Where to begin? At the top! Use the broadest markets and then narrow down to the indices and then individual stocks, or whatever you choose to trade. The 3 major markets I look at I call “the Generals”. They are the Russell 2000, the S&P 500, and the Nasdaq. These are all broad indices with many components, giving a better overall perspective of the market. Since the Dow Jones Industrials Index is comprised of so few stocks, one stock that experiences some event can throw the reading off. That said, you could use any index you want, as long as it is broad and represents a wide portion of the stock market.
You will need to choose one of these broad markets to get your entry signals from. Use one and stick with it, otherwise you will start second-guessing yourself and suffer from information overload. Whatever signal you use, try to find one that fires often. You want a lot of opportunities to get involved. Keep in mind that the actual entry signal is not as important as how you manage your trade. While that topic is outside of the scope of this article, by using this powerful method of selection, no matter where you enter you will know that the big players are here lurking. They want it, and when the broader market turns in the right direction, they will be there “participating”.
OK so you have your General, you have your signal (moving average cross, range breakout, trend lines, whatever), now what? Here is where your homework begins. There are powerful tools on the Prudent Trader website which will help you in narrowing down where you want to be. Additionally, it is VERY helpful to have some type of charting program which will allow you to visually analyze the TREND of the relative strength calculation. We will discuss this concept later. [Editors Note: All indices, ETF’s, and stocks in the various market scans and reports have links to charts at stockcharts.com. if you do not have a charting program of your own]
Step one: look at your General for the short-term analysis, specifically the last five days. Have we had strength over this period or weakness? Strength can breed more strength, but unless you have a quick trigger finger, waiting for a day of range contraction or a period of pullback is much safer. Also you will know sooner when you are wrong. These decisions should be made based on your holding period.
Now we have determined what the market has done over the past few days, what do we do with Prudent Trader’s powerful scans? Look for the indices (Sectors, Groups) that are outperforming the market! First we are looking for corroboration between longer-term readings and mid-term readings. These are “windows” in the time which tell you the persistence of the index’s relative strength. Prudent Trader’s site allows you to see how the index was performing a month ago relative to the broader market. We use the direction of the linear regression line of the relative strength to make the analysis. Whoa! What is that? Simply, the linear regression line of the relative strength is a “moving anchor” which gives a good idea of the longer term trend of the relationship between two markets.
The longer-term scan is your first list. Go to the Members’ Section; select “Relative Strength Tables” under”Index Reports” heading.
There is a lot to do here, but let’s stay focused. Once you are on the page, look at the column titled “LR Direction 21-Days ago (LR-21)”. Is the Linear Regression of Relative Strength trending up or down (+ or -)? Throw out the ones that are trending down. Those trending higher go to the top of the list [Note: you can now sort on this column by clicking on the heading]. Take a look at the ones that have an up trending Linear Regression line (+), even if they have a negative % reading today. The index may be starting a comeback. While this is a powerful tool, you are still going to have to look at some charts to see the trend of the relative strength VISUALLY. We will examine why next.
Markets fluctuate and anything that measure markets fluctuates as well. The question is whether there is a trend in the fluctuation or whether a range exists. This is a very important concept for relative strength analysis. This is because we don’t just want to find an index that is outperforming the market; we want to find one that is CONSISTENTLY outperforming in the time frame that is being traded. For this reason we want to see our relative strength line trending in the proper direction – even if the market is not trending. This is our edge, because it tells us that even if the price is not moving, there is some type of accumulation that is supporting and buoying this market. When the added fuel of a broad market move comes it is like a child letting go of a helium balloon. There is no holding back. If the line is moving sideways in a tight or wide pattern, there is no information to be gleaned. The market being examined is performing in sync with the market and we are not interested.
So we have the list of what was going on a month ago, and we compare it to the next reading in the column to the left, readings taken from a week ago. Is the moving average still moving up? Is there still a strong reading? If so we have a possible persistence of trend. Next column. Here’s where we start looking for aberrations. If there is persistence of trend, and our short-term column is giving a negative reading, we may have an opportunity. An important piece of knowledge is that stocks or indices undergoing accumulation will have high volatility, sudden sell-offs. During this period the market will under perform the General. This is shakeout of weak hands is typical of an up trend, and it offers “smart money” an opportunity.
Now that we have the knowledge of this opportunity, should we rush out and get involved? NO! Not yet… There is always a chance that this was a blow-off top or other type of capitulation. We need to wait for a signal from the index. This signal will likely occur about the time your General is giving a signal. When the General gives a signal, there is a good chance the tide has turned. If you jump the gun, you will get taken out. But if the entry signal comes, you should take it! This trade has a higher than normal profit potential, because you are in an index that is consistently outperforming the market, and will likely continue. So if you are blessed with a winner, it will likely run further than an under performing index. Take this same strategy and apply it to the components of the index you have located and you will be involved in the strongest stocks in the entire market!
Let’s look at an example to illustrate this concept. The following chart is a recent chart of the AMEX semiconductor index. The lines on the bottom are the Relative Strength reading compared to the S&P 500, and a 21-day moving average of this line.
1. Index is in a wide range bound pattern and has recently failed to continue lower after testing a horizontal support level. Notice that after trading in harmony with its relative strength line, the relative strength line made a higher low while the index made a lower low. This is commonly known as “divergence”, a clue of what is to come. If you were watching this market closely, you would probably take the trade when the trend lines broke. However this would not have shown up in our scans since the relative strength line has been trending down.
2. The Relative strength line breaks out of its pattern and we know we should be looking for an entrance. Intermediate and short-term scans are showing this index as a potential, but the reading from a month ago is still down.
3. Now our scans show that on the longer and intermediate term basis, this index is outperforming the S&P. The short-term reading is below the average line. Notice how there was an abrupt shakeout just before the #3 mark, but the line held steady instead of following price. Just before the #3 mark is a small range “inside” bar that indicated that volatility had dropped off. This is our opportunity – when volatility resumes, we want to be involved in our chosen direction.
4. After hitting new year highs, the index once again sells off hard. However, while the price is about at the same level as #3, the relative strength line is higher than where it was at #3. This market continues to outperform the market on a longer-term basis, and as you can see the relative strength line is still in an up trend. The proper move currently is to do nothing. Once the General has once again resumed its trend, you would want to take buy signals in this market.
The Prudent Trader scan site can be used for all sorts of scans, and this is just one approach. I hope it has sparked some ideas for you to investigate. The important concept to understand here is that the market is moved by the big players, and by seeing where the big players are putting their money keeps you swimming in the direction of the tide, not against it. This is not a sure fire approach, nothing is, but it places odds in your favor. Read the wealth of information on the Prudent trader site for tips on proper trade management and trading psychology, as these factors are likely the variables which can make or break you.
Good trading! Waveslider
Methods for using Relative Strength Analysis
A follow up by Waveslider
As a follow-up to the installment on Relative Strength analysis, this article will discuss methods and considerations for stock selection using the theories discussed previously. While those reading this will range in the time frame they trade, these ideas can be applied to all time frames, to all indices and stocks which are related to the broader market (i.e. the S&P 500, NYSE composite, etc.). Once again (using a long position as an example) what we are seeking to do is be involved only in the strongest sectors in the market, since this is the place where accumulation is taking place by institutions.
The first concept that should be addressed is the value of viewing multiple time frames. The tools we will discuss are very powerful and valuable, but a complete analysis requires looking at the time frame one level higher than the one being traded. Relative strength analysis will tell you where accumulation/distribution is going on, but these trends do not last forever. We need to know when a blow-off or major bottom is taking place to avoid being on the wrong side, and multiple time frame analysis takes care of this issue.
Fortunately, these cases are pretty easy to spot. Take for example, if you are trading a daily time, look at the weekly time frame. What you don’t want to see is any kind of high volatility spike that closes below the halfway point of the bar. In candlestick analysis this bar has a few names: shooting star, morning star, etc. Understand that this event doesn’t mean the trend is over necessarily, but it does mean that supply has temporarily caught up with demand, and there will be a reversal or a consolidation. In either case – you discard the situation and move on.
What you do want to see in your higher time frame analysis are signs of trend continuation or low volatility. In the first case you might be getting involved as the trend is in motion, in the second case you should be watching and waiting for what you are expecting to happen. In both cases you should see your relative strength line either flat or rising.
Don’t spend too much time staring at the higher time frame. The red flag should stand out to you; if it doesn’t then you have a candidate. Scanning for relative strength should be a process that makes your stock selection more efficient, so that you don’t need to spend as much time on analysis. Get to know the red flags and if they’re there just throw that chart out for now, avoid at all costs falling in love with a stock or sector. Unless you have some inside information, this will just burn you 9 times out of 10. There aren’t that many Google cases out there, believe it!
Using the scanning tools (Editor’s Note: see picture above) is a very useful way to narrow your focus on where money is flowing. What we are going to look at are just 2 measures, and these measures will cut down the universe of stocks to a short list so that you can look at just a few charts and determine where you want to be. Remember, in top down analysis you should be looking for entry into these stocks when the broader market gives you a signal. When this signal fires you will be entering the strongest stocks in the market.
The two tools we will discuss both involve the relative strength reading between two markets. Simply calculated, this formula is: MARKET #1 divided by MARKET #2 where Market #1 is the market being traded. There are 2 levels here, comparing the index against the broader market, and the actual stock against the index. So you are actually going to be doing this process twice.
Technical Indicator Tables
Prudent Trader Price Percent Oscillator
The Price Percentage Oscillator is found by subtracting a longer exponential moving average from a shorter exponential moving average and then dividing the result by the longer exponential moving average. For example: Like MACD many use the traditional 12 and 26 moving averages but you can use any combination of moving averages you choose. The Prudent Trader Model uses a combination of Fibonacci number averages for its calculations.
To Rank we take the raw PPO value for each and Rank it against all others in their respective categories, i.e. ETF, Groups, Indices to get 1 -> strongest to weakest. This is a measure of short-term momentum.
12) The PPO ranking basis today’s values.
13) Where did this rank one week ago, did it improve, remain virtually the same or decline?
14) Where did this rank one month ago, did it improve, remain virtually the same or decline? Remember this is a Ranking, if everything declines, this could decline less and therefore improve in Rank.
Prudent Trader Momentum:
The Prudent Trader Momentum (a proprietary calculation) takes a series of moving averages and applies an algorithm to analyze the intermediate term direction of a stock or index. The intent of this calculation is to help you not only determine the direction but to also keep you with the trend for the intermediate term. You will see 5 possible entries in this column: 1) Buy -> Trend is up; 2) B-wrn! -> Buy is still in effect but we have a warning notice of a possible trend change; 3) Sell -> The trend is down; 4) S-wrn! -> Trend is still down but we are warned of a possible trend change; 5) Blank cell -> no trend.
As a side benefit to this calculation is the B-wrn! And S-wrn! Very often during strong trends (either up or down) the warning is a good alert to look to join the original trend. That is to say if we are in a strong up-trend and we get a B-wrn! Look to go long perhaps using a previous short-term pivot point or Welles Wilders SAR, or a return to Buy, or whatever you choose. However you should wait for the previous trend to reassert itself prior to moving.
Every indicator has its ideal operating environment and environments where it does not operate well at all. In the case of the Prudent Trader Momentum, it operates extremely well in trending markets but not at all well in sideways choppy markets. My personal preference is to use the warning signals as explained on the chart above during strong trends as both an entry, and add too level.
15) The current posture of the PT-Momentum calculation.
16) The number of trading days since the previous signal expired. Note: this is only from Buy to Sell or vice versa, not the warning levels.
Prudent Trader Accumulation/Distribution:
Most Accumulation/Distribution lines are derivatives of Joe Granville’s original OBV or on balance volume developed in 1963. Most accumulation lines used today comes from the work of Marc Chaiken whose formula is simply:
((Close – Low)-(High-Close)) / (High-Low))=CLV
The CLV can only range from +1 to -1 and many use this number alone. Some however take the CLV number (a fraction) and multiply it by the volume with a cumulative running total to create the accumulation/distribution line.
The Prudent Trader calculation takes other factors into consideration such as the opening price. The difference between the PT calculation and the Chaiken calculation will most often be minor, however my personal opinion is the PT calculation is superior for finding divergences as well as confirmation. In addition to the raw calculation we keep a moving average of the accumulation/distribution line. If the moving averages rate-of-change is positive and the accumulation line is above the moving average then Accum is displayed in the respective column.
17) Accumulation – Distribution -> Accum; Dist; or blank cell means inconclusive.
18) Trading Days since previous condition existed, i.e. if Accum then the number of days since last Distribution reading.
Welles Wilders Average Directional Index (ADX):
J. Welles Wilder developed the Average Directional Index (ADX) in order to evaluate the strength of the current trend, be it up or down. It’s important to determine whether the market is trending or trading (moving sideways), because certain indicators give more useful results depending on the market doing one or the other.
ADX is an oscillator that fluctuates between 0 and 100. Even though the scale is from 0 to 100, readings above 60 are relatively rare. Low readings, below 20, indicate a weak trend and high readings, above 40, indicate a strong trend. The indicator does not grade the trend as bullish or bearish, but merely assesses the strength of the current trend. A reading above 40 can indicate a strong downtrend as well as a strong uptrend.
ADX can also be used to identify potential changes in a market from trending to non-trending. When ADX begins to strengthen from below 20 and/or moves above 20, it is a sign that the trading range is ending and a trend could be developing.
19) ADX value today.
Welles Wilders Directional Movement (DM):
For an excellent discussion of both ADX and Directional Movement visit Directional Movement Explained! These two indicators should be combined when analyzing your ETF, Group, or Index.
In order to prevent some whipsaws this calculation looks for the Positive (+) Directional Movement to be at least 1.1 time the Minus (-) Directional Movement to issue a Buy Signal and the +DM to be .99 of the -DM for a sell signal.
20) Posture of the Directional Movement System: Buy; Sell; or Blank -> no signal
21) Trading days since the previous signal expired.
Parabolic SAR:Parabolic SAR was developed by J. Welles Wilder Jr. and is described in his book New Concepts in Technical Trading Systems. SAR stands for stop and reverse. For a good brief discussion of the SAR concept visit: SAR Explained!
The Parabolic SAR has many shortcomings however once you learn and understand it you can use it as an adjunct with other trading indicators. The chart links on the reports will take you to stockcharts.com where you can then place the parabolic SAR stop points for your perusal.
The primary reason for including this in the reports is many people have difficulty in entering and/or exiting trades. The parabolic SAR will provide you with stop points should you be unsure of just how to enter or exit. The SAR is otherwise intended for short-term traders only! And only those thoroughly familiar with the concept!
One good use is if we are in an up trend for instance and you are not sure how you want to enter and the SAR is short at the moment (you will see this often), jump to the chart, place the SAR points on the chart (they change daily so you will have to look daily) and use that as an entry point and possibly the subsequent stop as your exit.
22) Current SAR position.
This is another indicator intended for short-term traders only and those that enjoy trading counter to the trend. This indicator measures the distance the closing price is from the 200-day simple moving average. Often when price is 20% above or 10% below the 200-day average it has a tendency to retrace back towards that average.
Short-term counter trend traders may wish to establish a position for that potential return, intermediate term trend traders will probably ignore, or lighten up just a bit, but sit through the correction. The simple reason that many good intermediate term traders sit through corrections is to not give up there position simply because of the difficulty reinstating that position. ReportExplainRTN
23) RTN: Buy -> is trading at least 10% under the 200-day moving average; Sell -> is trading at least 20% above the 200-day moving average. 3/25/06 – New Data added to Compare Stocks within Industry Groups and Indices
New data for your stock comparisons, be they by industry group or index. Added to the comparisons are trend definitions: short-term; intermediate term; long term. These are only definitions to guide you, not buy sell or hold signals or recommendations. After numerous back testing operations I settled on the following definitions: short term or very short term is the position of Welles Wilders Parabolic SAR (If you are not familiar with this technique go to the site’s learning center, click on Step 4, then click on Parabolic SAR); Intermediate term is UP if the 50 day simple moving average is rising and DWN if it is declining; Long term is UP if the 200 day simple moving average is rising and DWN if it is declining.
The next three columns contain: the Prudent Trader Accumulation/Distribution model applied to each individual stock. Basically if the moving average of accumulation is rising and the accumulation number is above that moving average Accum is printed in the column; conversely if the moving average of accumulation is declining and the accumulation number is below the moving average then Dist is printed in the column.
Next is the percent of the trailing 52 week high the stock closed at today. For example if the reading is 88 then today’s close is 12% off that high, 98 just 2% off that high.
The final column added is the same as the RTN column above but applied to individual stocks. In this output it is entitled possible return to the 200-day moving average. There is a tendency, repeat tendency, for a stock or market to move back towards the 200-day moving average if it reaches a level of 20% above it or 10% below it. Another way to look at this, is as an overbought/oversold indicator; the column will read sell if the stock is 20% or more above its 200 day moving average and buy if it is 10% or more below its 200 day moving average. Moving average direction is not a consideration.
The purpose of all this is not to inundate you with information, its intent is to make your analysis a bit easier; let me explain. As and example one of my longer term bullish scenarios pertains to gold and gold mining stocks. While I do not believe the time is quite right as yet, maybe in 2 or 3 months, allow me to go through how I will pick stocks within the sector when I believe it’s time. In addition to the gold futures markets there are various indices containing gold mining stocks as well as the Media General group 135. There is the Amex Gold miners index, the Amex Gold Bugs index, the CBOE gold index, and the granddaddy of them all, the Philadelphia Gold and Silver index. For today’s exercise and for those that have access to media general charts let’s first take a look at MG135 with the new trend definitions on the chart. If you do not have access to the media general charts then one of the gold indices should suffice for your analysis and you can also compare stocks within those indices on this site with the exception of the CBOE gold index.
Outlined on the above chart is the Parabolic SAR (purple dots) which is used to define the very short term trend; the 50 day simple moving average used to determine the intermediate term trend – dark blue line; and the 200 day simple moving average used to determine the long term trend – green line. Note the green arrows showing when those trend definitions changed from down to up and also note the red arrow showing how the intermediate term trend has now turned down. The long term trend, green line, is still in fine shape. The bottom window shows the Prudent Trader accumulation model which currently shows this group to be under distribution. We hope to continue adding and subtracting from these reports in order to make them more useful and easier to use. Your input is extremely important as to where this site goes in the future. If you have any questions, comments, or suggestions please feel free to send an email
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