er for the date specified.
Changeable constants
The smoothing constant used to compute the exponential average is a
function of the number of periods that the average represents. This
constant, expressed in terms of the number of periods represented by
the average, may be changed. The default value and the permissible
range are as follows:
Default
Range
Average periods
3
1-100
RSMD Tkr indicator
Relative Strength of
Bank America Corp. (BAC) compared
against its group,
Banking Group (RS Tkr 6029) 68 Technical Indicators Reference Manual
SK-SD Stochastics (SK-SD)
This indicator is the more classic version of George Lane’s
formulation of stochastics, and involves two components. The SK
component is typically a 3-day moving average of the stochastic ratio
as defined by Lane’s basic Stochastic formula (see Stochastic
indicator in this section). SK is again averaged over the same
number of days to obtain a double smoothed average ratio called SD.
AIQ has modified the indicator, which Lane originally developed for
futures trading, by lengthening the default value for the moving
average to a 10-day average to better reflect stock trading.
The SK component is always the upper line on up movements and the
lower line on down movements (see SK-SD chart). The SD
component is the lower line on up movements and the upper line on
down movements. With TradingExpert Pro’s default colors
displayed, the SK line is green and the SD line is purple.
The simplest interpretation of this version of the Stochastic is that
price trends will reverse when the value of SK diverges from price.
For timing following a nonconfirmation, buy signals are generated
when the SK line moves above the SD, and sell signals occur when
the SK moves below the SD. These signals are enhanced if the
second average, the SD, has already made the turn in the direction of
SK-SD Stochastics, IBM Chapter I: Technical Indicators Explained 69
the signal. When these situations occur at extreme ranges, below 10
and above 90, the SK-SD becomes less reliable as an indicator and
should be used only with confirmation of several other indicators in
the system.
Value shown in Control Panel
The value shown is the difference between the SK and SD lines for
the date specified.
Changeable constants
The time period used to compute the averages may be changed. The
default value is 10 days and the permissible range is 1 to 21 days. 70 Technical Indicators Reference Manual
Split
Volume
(SplitVol)
As the name of this indicator implies, Split Volume separates volume
into two components — up volume and down volume. On days when
price advances, volume is charted above the line. On days when price
declines, volume is charted below the line.
The pattern to watch for is the cluster, a series of days above or below
the center line. A cluster of up days following a price decline is
usually bullish, and a cluster of days below the center line after an
uptrend is often bearish. Declining volume during a strong up
movement is clearly seen, as is decreasing down volume when prices
approach a bottom.
The chart for Micron Technology (MU) shows clusters of up volume
that coincide with strong price advances. In January of 1995, the MU
stock was under consolidation. The Split Volume indicator showed a
few positive days before the breakout of the stock, then a cluster of
positive days as the breakout occurred. This kind of cluster marks
increasing strength in price and volume action.
Value shown in Control Panel
The value shown is the Volume for the date specified.
Changeable constants
The Split Volume indicator has no constants.
Split Volume,
Micron Technology Inc. Chapter I: Technical Indicators Explained 71
Split Volume Moving Average (SVMA)
SVMA is an exponentially smoothed moving average of Split
Volume. It is equivalent to a moving average of On-Balance Volume.
The pattern to watch for is a nonconformation between price
movements and movements of this indicator. Also, when there is a
divergence (trends do not agree), the direction of this indicator will
often signal the next direction in price action.
When the SVMA moves from positive to negative, it is considered a
sell signal. When the SVMA moves from negative to positive, it is a
buy signal.
More important is the use of the Split Volume Moving Average as a
confirmation of Expert Rating signals. An example of a confirmation
of a signal is shown in the chart for Lotus Development Corp.
(LOTS). On February 17, 1995, a downside Expert Rating of 96 was
issued by AIQ for LOTS. The stock continued to move higher, but at
the same time the Split Volume Moving Average topped out and was
decreasing. This nonconfirmation of upward price movement
confirms the bearish Expert Rating signal.
Value shown in Control Panel
The value shown is the value of the Split Volume Moving Average
for the date specified.
Note
AIQ recommends that SVMA
be used together with the
Split Volume indicator.
Split Volume Moving Average,
Lotus Development Corp. 72 Technical Indicators Reference Manual
Changeable constants for SVMA
The time period used to compute the exponentially smoothed average
is a changeable constant. The default value is 19 days and the
permissible range is 1 to 100 days.
Stochastic
The Stochastic indicator relates the closing price to the range in
prices for a prior period of time. George Lane, who developed this
indicator, determined that 21 days is the optimum period of time for
the price range. Hence, the indicator is usually referred to as the 21-
day Stochastic. The following discussion pertains only to a stochastic
based on a 21-day period of time (or 21-week period of time).
The 21-Day Stochastic relates the closing price to the price range
from the prior 21-day period. The 21-day price range is the
difference between the highest value in the last 21 days and the
lowest value. The indicator, expressed as a percentage, is charted on
a scale of 0 to 100.
Above 80% indicates an overbought condition, and below 20%
indicates an oversold condition. A sell signal is generated when this
indicator drops below 80%, and a buy signal is evident when its value
moves above 20%. The upper horizontal line on the 21-Day
Stochastic chart represents 80%. The lower horizontal line represents
20%.
In a non-trending market, the buy and sell signals produced by this
indicator are fairly reliable. But signals in a strong trending market
are premature and not as reliable. The chart for Intel Corp. (INTC)
shows that in the second half of 1994 Intel was in a period of
consolidation, a period when the Stochastic worked well. However,
as the stock moved into a strong uptrend the Stochastic gave several
sell signals, even as the stock moved higher.
This is a good example of how the AIQ expert system works. The
AIQ expert system combines the 21-Day Stochastic indicator with the
Price Phase Indicator into an Expert Rule. This rule says that a buy
signal is generated when the 21-Day Stochastic crosses the 20% line,
and the Price Phase Indicator is increasing. A sell signal is generated
when the 21-Day Stochastic drops below the 80% line, and the Price
Phase Indicator is decreasing.
Note
The term stochastic as
defined by Lane has little or
no relation to the real
definition of the word, which
is “a naturally occurring
random process.” By
industry accepted usage, the
meaning in technical analysis
terms is defined by the
stochastic equation. Chapter I: Technical Indicators Explained 73
This example shows how the AIQ expert system combines indicator
signals with expert knowledge and comes up with an Expert Rule
that, together with other Expert Rules, is part of a knowledge base
that produces an Expert Rating.
Value shown in Control Panel
The value shown is the value of the Stochastic indicator for the date
specified.
Changeable constants
The only constant required for the calculation of the Stochastic is the
period of time over which the price range is determined. Lane
determined that 21 days is the optimum period and for this reason the
default value is set at 21 days. Should you want to change this value,
the permissible range is 1 to 65 days.
Note
Testing of the Stochastic
constants by AIQ has shown
that 14 days is too short
(stocks are “whipsawed”) and
30 days is too long (valid
opportunities are missed).
The longer stochastic periods
were found to miss the tops
which are much shorter-lived
and more difficult to locate
than the bottoms.
21-Day Stochastic, Intel Corp. 74 Technical Indicators Reference Manual
Summation Index (SumInd)
The Summation Index is another indicator developed by the
McClellans (Reference No. 32) and is the summation of the Advance/
Decline Oscillator.
The Summation Index is not one of the indicators used in the
computation of the Expert Rating. This is because it is derived from
the Advance/Decline Oscillator, which is used in the Expert Rating
computation.
The Summation Index values appearing in the Control Panel are
computed as the sum of all dates beginning at least 200 periods (days
or weeks) prior to the current market date. Some charting services
publish values for this indicator which do not agree with the Market
Chart values. The reason for the difference is that the published
values are taken from summations that begin on different dates —
these services commonly begin summations tens of years ago.
Although the values may differ, the Summation Index available on
the AIQ charts is the same indicator and it is used in exactly the same
manner.
Note
The Summation Index can be
displayed only on charts of
market type tickers.
Summation Index,
AIQ Market Timing Chart