What Goes On Inside the Dow?

Posted on by The INO.com Team

Today I've invited Don Heggan from Dynamic Stock Market Strategies to discuss his insiders knowledge on what's really behind the DOW. Please take time and read the post and comment for Don to discuss.

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If you’re a trader and you don't know what’s going on inside the Dow, you don't know anything worth knowing. Learn to penetrate the smoke screen that the Dow-Jones Industrial Average has become.

The complex formula used to compute this monstrosity, called price-weighting, goes far beyond simply adding up the individual prices and dividing the whole thing by thirty. It, instead, employs a divisor designed to compensate for dividends and stock splits.

The effect of all this not only gives the higher priced issues more weight in the average but accounts for the incredibly high valuation of the average itself. Confused? Good! You're supposed to be. You see, dividing a number by a value less than one actually turns it into a multiplier!

The current divisor, as of this writing, is approximately (are you ready for this???) 0.122834016 which is the same thing as multiplying by 8!

That means a one point move in a stock is good for an eight point move in the average.

It also allows a few higher priced issues to give the illusion that the average stock is moving up when, in fact, the majority are moving down.

Imagine thirty men carrying a heavy load up a mountain. In the beginning all is well; each member is bearing their fair share of the load. As the climb continues, visualize one member at a time becoming exhausted and, unable to continue, dropping out. This means the heavy load, shouldered by a constantly shrinking number of remaining members of the climb, eventually collapses under its own weight.

If you were keeping track of the climbs' progress and noted that what started out as a 30 man team was now down to fewer than 15, what would be your prognosis?

What would be your prognosis if all you saw was the average moving higher and higher and were completely unaware of what was going on inside?

Inside the Dow: Ignore it at your peril.

Don Heggen

Publisher

dynamic-stock-market-strategies.com

Traders Toolbox: Elliott Wave Theory

Posted on by lindsay

MarketClub is known for our "Trade Triangle" technology. However, if you have used other technical analysis indicators previously, you can use a combination of the studies and other techniques in conjunction with the "Trade Triangles" to further confirm trends.

Elliott Wave Theory categorizes price movement in terms of predictable waves. Beginning in the late 1980s, R.N. Elliott developed his own concept of price waves and their predictive qualities. In Elliott theory, waves moving with the trend are called impulse waves, while waves moving against it are called corrective waves.

Impulse waves are broken down into five primary price movements, while correction waves are broken down into three. An impulse wave is always followed by a correction wave, so any complete wave cycle will contain either distinct price movements. Breaking down the primary waves of the impulse, correction wave cycle into sub-waves produces a wave count of 34 (21 from the impulse wave plus 13 from the correction wave), producing more Fibonacci numbers. Elliott analysis can be applied to time frames as short as 15 minutes or as long as decades, with smaller waves functioning as subwaves of larger waves, which are in turn sub-waves of still larger formations. By analyzing price charts and maintaining wave counts, you can determine price objectives and reversal points.

A key element of Elliott analysis is defining the wave context you are in: Are you presently in an impulse wave uptrend, or is it just he correction wave of a larger downtrend? The larger the time frame you analyze, the larger the trend or wave you find yourself in. Because waves are almost never straightforward, but are instead composed of numerous sub-waves and minor aberrations, clearly defining waves (especially correction wave) is as much an art as any other kind of chart analysis.

Fibonacci ratios play a conspicuous role in establishing price objectives in Elliott theory. In an impulse wave, the three principal waves moving in the direction of the trend are separated by two smaller waves moving against the trend. Elliotticians often forecast the tops or bottoms of upcoming waves by multiplying precious waves by a Fibonacci ratio. For example, to estimate a price objective for wave III, multiply wave I by the Fibonacci ratio of 1.618 and add it to the bottom of wave II for a price target. Fibonacci numbers also are evident in the time it takes for price patterns to develop and cycles to complete.

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You can learn more about the Elliott Wave Theory by visiting INO TV.

Report Calendar for September 9th, 2008

Posted on by lindsay

As I was walking out of the office today, I noticed on my calendar that tomorrow is the day for a few major reports to be issued in the housing and retail sectors. Just something to keep an eye on. Have a wonderful evening.

Best,

Lindsay Thompson
Director of New Business Development
INO.com & MarketClub.com

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Traders Toolbox: How to use the Directional Movement Index

Posted on by The INO.com Team

The Directional Movement Index, commonly called the DMI, is a powerful trend-following indicator. Many false signals generated by indicators such as the stochastics are filtered out by the DMI. Subsequently, this trading and analytical tool gives few signals, but, when generated, they tend to be very reliable.

Many, who at first glance are strangers to the DMI, find they are familiar with the prime component of the index: The ADX or average directional movement index. This discussion will center on the main use of the ADX, the turning point concept.

The DMI consists of three components: The + DI, which represents upward directional movement; the - DI, indicating downward movement; and the ADX, which signifies the average directional movement within a market.

In STRONG UPTRENDING moves, such as the late 1989 and early 1990 rally in the CRB, the + DI and the ADX turn up early in the move and move higher, with the + DI generally holding above the ADX. A high probability signal the uptrend has stalled or ended is generated when the ADX crosses above the +DI and turns down. This signal commonly occurs on the trading period of the trend change or slightly before. It rarely takes more than a few periods past a true trend shift to see the ADX turn down.

The rules for signalling a potential bottom are the same as for a top: Simply substitute the - DI for the + DI. There appears to be one slight difference between tops and bottoms: Generally, the ADX turns from a higher level when marking a top.

Several chart services plot only the ADX. In these instances, it can generally be assumed that a downturn in the ADX which occurs after crossing above 40 will have seen the ADX cross above the + DI if the market had been in an uptrend and above the -DI if in a downtrend. In simple terms, a move by the ADX above 40 followed by a downturn generally signals a probable trend change.

Signals such as those which occurred in May, 1990 and February, 1991 in the CRB index (arrows) can be very valuable in confirming a turn which had been projected by unrelated methods of technical analysis. ADX signals can help confirm the expected completion of a wave structure or to underscore a turn within a critical time period.

The DMI is based on a certain number of periods. I have had the most success with 14 days on daily charts. And with the exception of Treasury Bonds, for which I use 14 weeks, I prefer to use 9 periods on the weekly and monthly charts.

Editors note: While the examples shown are somewhat dated the concept and use of the ADX is not. The ADX indicator is available on MarketClub.

"Saturday Seminars" - Trade System Evaluation Methods

Posted on by lindsay

System developers all too often design systems that produce excellent returns on paper while disregarding real world influences. David presents a few of his own personal trading programs and discusses how to properly evaluate their returns.

This seminar reviews Dynamic Zones, Average RSI, VIX, Best Day system, Trix, and the KST System. David discloses the programming code for most of the systems discussed. The evaluation of these systems centers on statistical methods that highlight the strengths and weaknesses of any trading system. David also discusses his favorite trading instruments: OEX options and the Rydex Nova and Ursa mutual funds. He summarizes his relatively conservative approach to trading the general market through the use of these investment vehicles.

PDF Workbook

David Stendahl is a professional trader, registered investment advisor and Vice President of TradeSignals. David co-founded RINA Systems in 1995, a firm specializing in performance analysis software for traders and investors. He specializes in S&P futures, OEX options and S&P Index funds.

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Saturday Seminars are just a taste of the power of INO TV. The web's only online video and audio library for trading education. So watch four videos in our free version of INO TV click here.

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