How To Read the Technical Analysis Graph (series)

TAGs are a series of technical analysis graphs (sometimes called charts) for a particular issue. Each graph is created with our special PHOEBE DRAW™ software, is presented on its own landscape page, and may be magnified greatly without sacrificing the clarity of graphics and text. TAGs are provided in Adobe Acrobat PDF format. If you choose to print these you can use your printer properties and print them multi-up, that is two-to-a-page, four-to-a-page, however you want.

In the narrative below we refer to the TAGs for Pacific Ethanol Inc (symbol: PEIX) during 2006 Q2. You can download the 158 KB PDF file of the graphs or open the PDF Document containing the graphs in a new window.

TAGs Title Page & Bookmarks

Chart Titles

Why are charts in this order?

Price Graph

Long View

Performance Graphs

RATR/ADX

TCPD/TNPD Chart

Volume

Moving Average Convergence/Divergence (MACD) Chart

Detrended Price Oscillator (DPO) Chart

Triple Exponential Smoothing of the Log of the Closing Price (TRIX) Chart

On Balance Volume (OBV) Chart

Commodity Channel Index (CCI) Chart

PDI/MDI

Lane’s Stochastics Chart

Title Page Columnar Data

Archived Reports

Notes

TAGs Title Page & Bookmarks

Each series of technical analysis graphs starts with a title page with our ligature and a reminder on where you can find this information on how to read the charts. Below that is some columnar data we’ll discuss last. Each PDF has a full set of bookmarks to simplify navigation within the document

[Top] [PEIX PDF]

Chart Titles

At the top of each chart is the symbol (PEIX), the name (Pacific Ethanol Inc), the date range and “split-adjusted”. What is “split-adjusted”? We maintain several different databases for price activity and use each as appropriate. One is “historical-actual” where we keep the actual prices at the time in history. Another is “split-adjusted” where we take splits back in time to find the split adjusted price. For the four month range of TAGs it is important that the prices and TAIs reflect the per share price, net of any splits.

[Top] [PEIX PDF]

Why are charts in this order?

There is a lot of data in these charts so they are arranged in the order most likely to disqualify an issue from your consideration. That is correct, the charts are set up so you can quickly decide this one isn’t for you.

We start with the Price Graph showing the last four months of activity. Then the Long View chart followed by Performance Graphs. Following these overviews are the supporting details in graphs for RATR/ADX, TCPD/TNPD, Volume, MACD, DPO, TRIX, OBV, CCI, PDI/MDI and Stochastics.

[Top] [PEIX PDF]

Price Graph

This chart primarily contains the price (shown in candlesticks) and many other elements for about the last four months.

The thick black line is SMA(199)(Closing Price), the 199-day simple moving average (SMA) of closing price. The green plus-signs (+) are SMA(49)(Closing Price), the 49-day simple moving average of closing price. For more on their interaction see Golden Cross in the education section of this web site.

The series of purple horizontal line segments are Fractal Exit Points.

The Parabolic Stop and Reverse (PSAR) points are shown as green circles below the price (for the trailing stop for a long position) and red circles above the price (for the trailing stop for a short position). (note: on some monitors the circles may appear more as ovals.)

Interpretation Guidance for Price Graph
PEIX had a volatile period starting at about $17/share in late February 2006, rising to over $40/share in early May 2006 then falling back to just over $20 by mid-June 2006. Notice that until early June the SMA(49)(Closing Price) was rising faster than the SMA(199)(Closing Price). This indicates that shorter term prices were rising faster than longer term prices, generally a very positive sign. The slow response of a 49-day moving average is clear when observing that it took the entire decline from early May to mid-June for the 49-day moving average to stop rising. The 199-day moving average is still rising indicating that even as of mid-June the newer prices are higher than those prices falling off the 199-day moving average.

Positive Territory listed PEIX on the Daily Abbreviated Report March 29, 2006 using Hollinger Liquidity Index (HLI) criteria. It would not have been listed on the DAR-1M report because its 20-day moving average of volume was 854,515 shares, less than the 1,000,000 share floor. Lets say your purchase was at the open on March 30, 2006 at $22.95/share.

Had you been using fractal exit points you would have exited this position about May 17th as the prices fell through the highest preceding purple fep2 line segment. That was the same as the closing price of $32.86 for a gain of $9.91 or 43.18% in 33 eDays for an extension of about 340% an excellent trade!

$9.91 = (32.86 – 22.95)
43.18% = (9.91 / 22.95)
33 eDays = March 1 eDay + April 19 eDays + May 13 eDays
340% = ( ( 43.18% / 33 ) * 260 )
All gains or losses do not include commission or margin expenses.

Had you been using Parabolic Stop and Reverse and your purchase was at the open on March 30, 2006 at $22.95/share you would have noticed the first red circle after the close April 18, 2006 and sold at the open April 19 at $31.68. The gain would have been $8.73 or 38% in 13 eDays for an ext of 760% ( (38% / 13 ) * 260 ). This materially higher ext than the FEP2 exit is because of the shorter trade duration. Notice that you would not have participated in the rise from 30 to 44 in late-April and early-May. None the less, this would have been a profitable trade.

Had you been following candlesticks you would have noticed the pattern formed on April 10 and 11 was the Engulfing Pattern (Hollow) which interprets this a bearish reversal of the uptrend. Selling at the open on April 12 at $29.87 would be a gain of $6.92 or 30% in 8 eDays for an ext of 979% ( ( 30% / 8 ) * 260 ). Again, the higher ext is due to the shorter eDays.

April 12 and 13 candles formed the Harami Bullish Reversal indicating a reversal of the downtrend. This was prescient as the next day opened higher and kept rising that day.

April 20 and 21 candles formed the Homing Pigeon Bullish Reversal which interprets this as the downtrend is weakening. It did weaken then recovered to rise to the high point about May 12, 2006.

Any way you look at it, the Price Graph contains a great deal of information!

[Top] [PEIX PDF]

Long View

This chart runs from our earliest data date plus 200 days to the most recent. If an issue does not have at least 200 days of trading history there won’t be a SMA199 line on the Long View Chart. Similarly there should not be an 199-day simple moving average line in the price chart.

The closing price is shown in purple. The green line is the 49-day simple moving average of the closing price. The black line is the 199-day SMA of the closing price. A ‘D’ on the x-axis indicates a dividend. An ‘S’ indicates a split. Like the other charts in TAGs the data presented has already been split-adjusted.

With a one day difference in parameters this chart shows the indicator sometimes known as Golden Cross or SMA(50/200)(Closing Price). In the simplest form when the green line crosses over the black line (ie SMA(49)(Closing Price) x+ SMA(199)(Closing Price) ) that is a positive development and an indicator of a future price rise. When the shorter moving average crosses under the longer moving average (ie SMA(49)(Closing Price) x- SMA(199)(Closing Price) ) then this is no longer positive and is an indicator of future price decline.

There is a second set of signals in this same chart. Look at the relationship between the
49-day moving average and the closing price. The closing price can also be thought of as a 1-day moving average. For more details on that see the section on SMA(1/49)(Closing Price).

Interpretation Guidance for the Long View
Looking again at PEIX we can see this chart was not four months as the previous charts, but runs from 2006-01-06 to 2006-07-12, a bit over six months. Why is this? PEIX started trading in March 2005. We need 200 trading days to get the first data point on the 199-day moving average. Even so, we can glean some good points from this shorter version of a long view chart.

Notice in mid-January 2006 the closing price dipped under the 49-day moving average. Not a good thing, but a few days later the closing price crossed back over. At that point the closing price was about 11. The closing price stayed above the 49-day moving average until mid-May 2006 when it crossed under again at about $27/share. Had you been following just these signals the gain would have been quite pleasant. Hopefully you noticed that $27/share was well below the over-40 high and some of the other indicators described above would have kept more of that money in your pocket.

Like in mid-January 2006 the closing price soon crossed back over the 49-day moving average, but unlike mid-January the closing price quickly crossed back under. During the remainder of the chart period the price continued to trend down and never crossed back over the 49-day moving average. So what can you take from this?

Like many of the indicators above a signal that foretells a price decline is not necessarily a reason to sell. It is a concern to be addressed, most commonly by tightening your stops to reduce your downside risk. Take a look at the chart for Panera Bread at the bottom of the Golden Cross. Notice that by the time this is no longer a positive development at least one better exit point had already gone.

Perhaps the best use of the long view chart is to get a better feeling for the long term trends for a particular issue. If it has gone from a high of $80 (after adjusting for splits) in early 2000 and has been steadily declining for a long time to about $3 in mid-2006, you might be leery even if the technical analysis indicated a price rise in the short term.

Those who cannot learn from history are doomed to repeat it.
        George Santayana

The long view chart will help you avoid ignorance of the past, but learning, that is the difficult part.

[Top] [PEIX PDF]

Performance Graphs

What is a performance graph?
Given that issues trade at different prices you can’t directly compare price history from one issue to another. Consider two issues each measured at the same two points in time.

BBB gained $4. AAA gained $2. Is BBB the “better” performer? Relative performance is generally measured in percentage gains or losses. So

So, for these two issues, over this period of time, AAA would generally be considered the better performer.

Performance graphs reflect percent changes over time. All elements to be compared start at zero percent at the start of the comparison. At the far right side is where those elements are at the end of the comparison.

You can’t use Current Price / Initial Price because that is bounded at the lower end by zero and can’t show negative percentages so the formula for determining percent gain or loss is (Current Price – Initial Price ) / Initial Price.

Performance comparisons may vary over differing time periods. For example: In the short term the issue under consideration may soundly outperform a benchmark. Yet, in the longer term that same benchmark was a materially better performer. So which is more important? You can’t buy a stock in the past, so maybe the shorter term performance is more relevant? On the other hand maybe the short term results were an aberration from an issue’s long term performance and the longer term is more relevant? The answer - you need to see both long term and short term performance.

The single page for Performance Graphs is divided into four equal quadrants where we present four performance charts, each with differing duration.

A thick red line is for the issue under consideration.

We compare to the following benchmarks:

DIA The Diamonds Trust, Series 1
Shown as a thick-dashed purple line, this is a Unit Investment Trust (UIT) designed to generally correspond to the Dow Jones Industrial Average and is classified by Morningstar as Large-Value.

GLD streetTRACKS Gold Trust
Shown in dashed-blue line, this is designed to reflect the price of gold bullion, less expenses. It is not classified by Morningstar.

IWM iShares Russell 2000 Index
Shown as a thin-dashed purple line, this is a Unit Investment Trust (UIT) designed to generally correspond to the Russell 2000 Index. IWM is classified by Morningstar as Small-Blend. For more see Russell Investment Group at www.russell.com.

QQQQ NASDAQ 100 Trust Shares
Shown as a dashed green line, this UIT is designed to generally correspond to the Nasdaq 100 index. It is classified by Morningstar as Large-Growth.

SPY SPDRs (pronounced “spiders”)
Shown as a thick black line, this Unit Investment Trust is designed to generally correspond to the Standard & Poors 500 Index. SPY is classified by Morningstar as Large-Blend. For more see The Standard & Poors web site at www.standardandpoors.com.

Morningstar Categories
Morningstar provides many investor services. One service is to place mutual funds, exchange traded funds (ETFs) and UITs in one of nine categories based on the actual holdings of the fund. There are three sizes of market capitalization (Large, Medium, Small) and three investment styles (Growth, Growth & Value (called Blended), and Value). For more details see the ETF page on the Morningstar Website.

Here is a table showing the issues described above placed in their Morningstar categories. Several other funds or trusts are listed for comparison. GLD is not categorized.

Interpretation Guidance for Performance Graphs
Take a look at the 2-month performance chart for PEIX. At the end of the last two months all of the benchmarks lost some value. PEIX did worse, losing almost 40% over that 2-month period.

Now take a look at the 6-month performance graph. What a difference! PEIX had reached a high of over 300% from mid-December 2005 to early-May 2006. The best benchmark performer was GLD with a 40% rise.

The 12-month performance graph is about the same as the 6-month, but you can see in mid-2005 PEIX performed poorly, reaching down more 30% before peaking up in late January 2006 and rising to the peak in early-May 2006.

The longest term performance graph shows that PEIX outperformed of all the benchmarks by a significant margin.

Remember: Past Performance is no Guarantee of Future Performance!

[Top] [PEIX PDF]

RATR/ADX

The black line is ADX and is measured on the right vertical axis. The green line is Relative Average True Range (RATR) and is measured on the left vertical axis.

Interpretation Guidance for RATR/ADX
Even at the low point about March 27, 2006 PEIX had an ADX of 25% or more indicating strong trend. All during April 2006 ADX was higher than 30% and was a very strong trend. It started to waffle (rise a bit then fall a bit, but still above 40%) until it started to decline about May 12.

Is this strong to very strong trend good or bad? Remember, ADX measures strength of a trend, not direction. As we can see the price trend was generally up this is good.

RATR, the measure of relative volatility, was at its low of about 4.2% just before PEIX appeared on the March 29, 2006 DAR-HLI report. It rose to an incredible 15% by May 22. Is this good or bad? Again, RATR is a measure of volatility, not trend direction. As we can see the trend is generally up this indicates a high volatility in a generally positive direction. This is good, but you need to guard against a volatile downswing taking your unrealized profits away. Have good stops place and change them as the situation warrants.

[Top] [PEIX PDF]

TCPD/TNPD Chart

This chart shows a simple bar graph where each technical analysis indicator (TAI) that is positive that day is shown. If the TAI is a new positive development (NPD) that day it is shown in blue. If it was new in the past and is still positive it is a cumulative positive development (CPD). The “T” is for “total” because this charts shows the total number of CPDs and NPDs.

Interpretation Guidance for TCPD/TNPD Chart
Notice on March 29, 2006 PEIX had seven TAI positive. Only one (MACD) was new, the others had turned positive in the past and were still positive. This is about the strongest showing an issue can have.

TRIX was no longer positive (NLPD) April 13, 2006
MACD was no longer positive April 27, 2006
DPO was no longer positive May 17, 2006

Remember, it is these three core TAI that get us into a trade. It is almost axiomatic that what gets you into a good trade won’t get you out of a good trade. In other words, what was a good tool to get you in at a good time won’t get you out at a good time. Maybe, maybe not.

An exit at the open April 17 (April 14 was the Good Friday holiday and 15/16 was the following weekend) would have been at $31.48. If your purchase was at the open on March 30, 2006 at $22.95/share this would have been a gain of $8.53 or 37%.

An exit at the open April 28 would have been at $33.02. If your purchase was at the open on March 30, 2006 at $22.95/share this would have been a gain of $10.07 or 43.8%.

An exit at the open May 18 would have been at $31.02. If your purchase was at the open on March 30, 2006 at $22.95/share this would have been a gain of $8.07 or 35%.

All of these were nice, very nice gainers, but pale in comparison to selling at the open May 12 at $43.66 (the high of $44.50 was the day before). If your purchase was at the open on March 30, 2006 at $22.95/share this would have been a gain of $20.71 or over 90%.

A percentage trailing stop would likely have exited the position several times since purchase. A multiple of ATR might have done the same.

The perfect exit is still undiscovered, or at least, unpublished.

[Top] [PEIX PDF]

Volume

This chart shows individual day volumes as a bar graph. A green bar means that day’s closing price is greater than yesterday’s closing price. A red bar means that day’s closing price is less than yesterday’s closing price. If the closing price is the same as the previous day’s closing price the bar is black. The first bar is always black.

Also shown is a line indicating the 20-day simple moving average of volume. Ie: SMA(20)(Volume).

Interpretation Guidance for Volume
Generally vertical bars breaking the 20-day moving average indicate significant events. Green bars moving above the line indicate heavy buying days, good for supporting price rises. Red bars indicate heavy selling and foretell a price decline.

For PEIX look at March 27, a green bar just at the line. The day’s volume was actually 657,814. The SMA(20)(Volume) was 617,874, so it was a breakthrough. April 11 was a high volume red bar. It was the first major price drop.

Remember the high volatility of PEIX as demonstrated by RATR above? High volatility shows up again in the volume chart. Green bars interspersed with red bars. Think about it for a minute. At just about every price level someone will decide they have had enough volatility (or have run out of antacids) and will sell. As the price gets higher and higher more and more people are looking at unrealized gains they want to keep in their pocket.

One way to resist this urge to sell is to watch the average. As long as prices are moving mostly up, as long as green bars outnumber red bars, as long as the average volume is still growing, you might want to reduce your risk through tighter stops but you might want to hold the position.

Everyone has their own risk tolerance. Don’t exceed yours.

[Top] [PEIX PDF]

Moving Average Convergence/Divergence (MACD) Chart

Red areas are where the MACD histogram is negative. Red is bad. Green areas are where the histogram is good. Where the green is immediately preceded by a red, that green represents a new positive development (NPD). Where red is immediately preceded by a green that red makes MACD no longer a positive development.

Interpretation Guidance for MACD
Look at PEIX on March 28, 2006. The MACD is red. The next day it was green. This new positive development is shown on the TCPD/TNPD graph (above) by the blue X on March 29, 2006. MACD was no longer positive for one day then went NPD the next day, May 1, 2006. MACD rose and fell until it went red about May 15 and has stayed red through the end of the graph.

What is good and bad? A decline in the MACD histogram generally foretells a price decline. Certainly that was the case for PEIX on April 10, but it recovered. Then MACD fell again on April 17, but it recovered. Notice it recovered in both cases, but not to the high of April 10. Now take a look at what we know (hindsight being 20:20) was the high, about May 15. Where was the MACD? At its near low. Should you sell when MACD drops? Maybe, maybe not.

Certainly a dropping MACD is cause for concern. You might want to limit your downside exposure through tighter stops but you might want to hold the position until the market takes you out. On one trade you may sell early, on another you might hold on for the next rally. In any case, don’t exceed your risk tolerance.

[Top] [PEIX PDF]

Detrended Price Oscillator (DPO) Chart

Red areas are where the DPO is negative. Red is bad. Blue areas are where the DPO is good. Where the blue is immediately preceded by a red, that blue represents a new positive development (NPD). Where red is immediately preceded by a blue that red makes DPO no longer a positive development.

Interpretation Guidance for DPO
Is pretty much the same as for MACD above. A dropping DPO is cause for concern. Sell if you are at your risk tolerance otherwise think about tightening your stops and hang on a bit in case the prices go back up like they did for PEIX on April 11, 2006.

[Top] [PEIX PDF]

Triple Exponential Smoothing of the Log of the Closing Price (TRIX) Chart

Traditional presentations of TRIX generally show only the TRIX and the TRIXSIGNAL. That made it very difficult to appreciate the increase or decrease in amplitudes. How much was TRIX over the signal? Was that difference growing or shrinking? So we added a differential histogram to make it easier to see.

Referring to the histogram red areas are where TRIX is negative. Red is bad. Green areas are where the TRIX is good. Where the green is immediately preceded by a red, that green represents a new positive development (NPD). Where red is immediately preceded by a green that red makes TRIX no longer a positive development.

Interpretation Guidance for TRIX
You could probably guess this, but the guidance for reading the TRIX histogram is the same as for interpreting MACD above with one difference. The TRIX histogram is generally more volatile, switching from red to green and back again more frequently than DPO or MACD.

Take a look at the TRIX chart for PEIX. Notice the number of one and two day TRIX red periods. TRIX bottomed about May 22, 2006. Look back at the price graph. Would you have held that long? By May 22 a FEP2 stop loss would have triggered, so would a PSAR-R stop loss, as well as a number of trailing percentage stops. So, one red TRIX is too sensitive, a lot of them are not sensitive enough to use as a good exit point. Still, a declining green TRIX is a cause for concern. A green-to-red TRIX is cause for a bigger concern.

[Top] [PEIX PDF]

On Balance Volume (OBV) Chart

On Balance Volume is a single line and the EMA(3)(OBV) is used as a trigger. Because the EMA duration is so short and the numbers used in determining OBV are so large this TAI can have material swing range even during times of low volatility.

There are three possible bar colors. Green is when the OBV line is greater than its EMA(3)(OBV) trigger line. This indicates that more trades are being initiated as a buy than as a sale. In other words, more people want to buy this issue than want to sell it.

A hollow bar indicates that the trigger line is 1% or less greater than the OBV itself. This is not good, but not much to worry about. Hollow bars are rare and none appear for PEIX between 2/21/2006 and 6/16/2006.

A red bar indicates a trigger line that is more than 1% greater than OBV itself. This is cause for concern as it indicates that, when measured by volume, there are materially more sellers than buyers. This foretells a price decline, something we generally want to avoid.

A shift from red or hollow to green is a new positive development. A shift from green to red makes it no longer a new positive development. A shift from green to hollow does NOT make it no longer a positive development. In other words, up to 1% negative is still within the acceptable range of positive.

The vertical green, hollow and red bars are measured against the left vertical axis. The OBV and its trigger line are measured against the right vertical axis. Be sure and refresh your understanding of On Balance Volume (OBV) before proceeding.

Interpretation Guidance for OBV
For PEIX 2/21 – 6/16/2006 notice the low volatility through March 27, 2006. Now compare that to the price activity during the same period. Not much of a price swing and not much OBV volatility. March 28 was a new positive development for OBV and marks the beginning of a large movement of price and volume to the upside. Compare the volume graph for that date. This was the first major breakthrough of the SMA(20)(Volume) levels.

April 13, 2006 was a very small red bar, not good, but not a big source of concern. The next trading day was a very small green bar. Not bad either, but given the large numbers involved in OBV this near-balance condition could head either way.

April 18, 2006 showed the direction was down. This was a major price retracement. Notice for two weeks through May 1 OBV was down, down lower, then recovering and going positive the first week in May 2006. That recovery lasted about two weeks then the price dropped significantly starting the week of May 15. As we can tell from the price graph by May 15 the price was already headed down.

So, should you sell on any red bar day? Probably not. As you can see around April 17, 2006 for PEIX it was green, then red, then green, and then red. They were also small bars indicating a near-balance condition.

Should you sell on a BIG red bar day? Does your risk tolerance tell you to get out now? If so, then don’t play against your risk tolerance even if you have a large supply of industrial strength antacids. What you might do is consider red bars (or even declining green bars) to be a cautionary notice. Take the opportunity to review your exit points. Maybe you might want to limit your downside exposure through tighter stops but you might want to hold the position until the market takes you out. On one trade you may sell early, on another you might hold on for the next rally. In any case, don’t exceed your risk tolerance.

So what should you do a BIG green bar day? Sell on up-volume? Maybe, maybe not. OBV for PEIX about April 10, 2006 shows how even a good run dwindles. So, big green bars are also an opportunity to reconsider your exit points. Move the sell order higher and higher. Leave downside room for expected fluctuations (see Average True Range) so you don’t get taken out on a predictable intra day dip but can still protect the majority of unrealized gains. Based on OBV alone this might have gotten you out in mid-April, but you should be using more than a single-TAI for decision making. Remember, better a small gain than any loss. Having a sale order in place at a price higher than purchase can reduce your investment related stress.

[Top] [PEIX PDF]

Commodity Channel Index (CCI) Chart

The Commodity Channel Index is a single line with unlimited top and bottom range. It is used primarily to find changes in trends. Although the range of the CCI is unlimited most of the fluctuations between –100 and +100 are considered to be random within that range. It is the transition from within that range to outside that range and vice versa where we get valuable information.

It is considered a positive development when the CCI crosses over +100 from below 100 (CCI x+ 100) and when the CCI crosses over zero from below zero (CCI x+ 0).

Interpretation Guidance for CCI
Look at the CCI chart for PEIX between early-March and mid-April 2006. It wasn’t until just after March 27, 2006 that the CCI broke out from below +100 to above 100 (CCI x+ 100). Take a look at the price chart for the same period. Yes, the price was moving up, but that much? The CCI peaked at over 250 in late March. The price didn’t peak until mid-May. Yet the CCI was indeed foretelling a significant price rise.

The CCI fell and rose several times during April and crossed under 100 (CCI x- 100) several times and then crossed back over. Should you sell at that point? You might be able to guess the answer: maybe, maybe not. You shouldn’t take a single TAI in isolation but look at the situation as a while. If your risk sensitivity merits it, consider the cross under as a time to review your exit points. A dip under 100 is a concern, but as long as CCI stays in the upper half random zone of +100 to –100 it is just a concern.

A cross below zero (the mid-point of the random zone) is more of a concern. This happened to the CCI of PEIX about April 16. Compare that to the price movement at the same time. This was the beginning of the major price decline. So, a cross under zero is a time to take stock of your risk tolerance and or limit your downside exposure through tighter stops. You might want to hold the position until the market takes you out. One such trade may get you out too soon. Another might keep you in for the next rally. In any case, don’t exceed your risk tolerance.

Notice that over the period of this chart, from the point where CCI x- 0 it never recovered to cross back over zero. Neither did the price recover.

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PDI/MDI

This chart is an slightly enhanced implementation of the Directional Movement Index developed by Welles Wilder. PDI/MDI indicates the direction, but not the strength, of a trend. For trend strength (but not direction) see ADX above.

The thick black line is the ADX, the same ADX as shown on the ADX/RATR graph. It is measured against the right vertical axis. The thin green line is the Positive Directional Index (PDI). The thin red line is the Minus (or Negative) Directional Index (MDI). They too are measured against the right vertical axis.

The enhancement is the creation of a color coded differential histogram. Rather than trying to estimate the changes in PDI over MDI (or vice versa) we show that as a bar measured against the left vertical axis. If MDI is greater than PDI that is a red bar measured on the negative part of the left vertical axis. If PDI > MDI it is a green bar.

Green bars can be thought of as price pressure in a net upward direction. This means prices should be moving in a generally up direction. Notice this is “generally” up. Some days may still be down, but in general they should move up. Red bars are the opposite. Red bars can be thought of as price pressure in a net downward direction. Prices can still rise some days, but in general they should move down.

When a green bar is immediately preceded by a red bar then this is a positive development. When a red bar is preceded by a green bar then this is no longer a positive development.

Interpretation Guidance for PDI/MDI
Looking at a PDI/MDI chart for PEIX late-February through mid-April 2006 we can see this TAI in action. This turned positive before the period of the chart. Notice the gradual decline of green bar height to about March 9, 2006. The direction of the trend is still up, but it is getting weaker. Take a look at the price action during that same time. The daily prices are waffling up and down, but look at the SMA(49)(Price), it is heading steadily upward.

Now look at DPI/MDI on March 27, 2006. It is the start of an increasing strength uptrend in trend direction. Notice that was actually the date the ADX path turned from downward (decreasing trend strength) to upward (increasing trend strength). Think about this for a minute. If you toss a ball up its upward velocity slows and slows until it stops then starts downward faster and faster. At the point velocity is zero the direction changes from headed up to headed down. This is similar. If the trend direction is down and ADX (trend strength) is high then ADX needs to weaken before trend direction can reverse and head up. Where the analogy fails is that a tossed ball has a continuous motion, it has to go through every point on the way up and down. A price trend can have a discontinuous motion taking leaps and unexpected turns.

About April 1, 2006 there was a large decrease in trend direction. Should you sell? (Lets say it out loud!) “Maybe, maybe NOT!”. Don’t take one TAI in isolation. Look at the price movement, it was pretty small. PDI/MDI is a measure of trend direction, what did the trend strength (ADX) do at that time? ADX was flat at about 29%, still a strong trend. So a decrease in trend direction measurement, in the absence of a reduction in trend strength is little cause for concern.

Tale a look at the decrease in trend direction for PEIX on April 18, 2006. Is this different from April 1? No, the ADX is still high at over 40% and ADX is still moving up. What is different is April 20. ADX is declining (the strength of the trend is decreasing). A cause for concern? Yes. Time to sell? Maybe, maybe not.

Look at the price action for the week of April 17 through 24, 2006. This was a major down correction. If you were watching PSAR (above) you probably took the opportunity to tighten your exit and reduce your risk. If you were a FEP2 follower (see purple lines fep2 in Price Graph on Pg 2 of Peix.pdf) you would still not have sold because, despite the dramatic declines, the price never dipped below the $27/share level set April 12, 2006. In fact, April 20, 2006 set a new FEP2 floor.

PDI/MDI rose and fell many times between the high on April 11 and April 17, 2006, but it never went red. Each downward fall is worthy of note. Several times the ADX fell with the PDI/MDI and those points were worthy of concern. Notice that the ADX recoveries were just a bit weaker each time. Starting about May 10, 2006 the PDI/MDI started a serious decline accompanied by a material decline in ADX. On May 18, 2006 the PDI/MDI crossed from green to red and was no longer positive.

Would you still have been holding PEIX on May 18, 2006? FEP2 would have set a floor at about $33/share on May 4, 2006. That would have been triggered by the intra-day low on May 17, 2006. PSAR watchers might have noticed the conversion from green circles to red circles starting May 15 accompanied by significant price drops. That might have been enough to tighten stops very tight.

Hindsight being 20:20 the best play might have been a 10% trailing stop reset daily. The closing price on May 12, 2006 was $42.00, a 10% trailing stop would have been set at $37.80. The low of May 13, 2006 was $36.31 so a stop at $37.80 would have been triggered. That would have been better than FEP2.

Lets say your purchase was at the open on March 30, 2006 at $22.95/share. Selling at $37.80 would have been a gain of $14.85 or almost 65%. The number of eDays and computation of ext are left to you.

Some things to consider: Would a 10% trailing stop have gotten you out between March 30 and May 13? Would your risk tolerance have allowed a looser (higher-percentage) stop some time? Find out by paper trading before investing real money.

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Lane’s Stochastics Chart

Our presentation of Lane’s Stochastic Oscillator contains the small enhancement of a color coded differential histogram. Rather than trying to estimate the changes in %k (the red line) over or under %d (the black line) we show that difference as a bar. The lines and the bar are both read against the right vertical axis. The lines range between zero and 100. The green bars start at zero and go up. The red bars start at zero and go down.

Stochastics can indicate a positive development two ways. The first is when %k crossed over %d (%k x+ %d). Because of the construction of this TAI this can happen frequently. Just as frequently this becomes no longer a positive development when %k x- %d. The rapid and repeating change between states is a damaging whipsaw to be avoided.

The second manner of generating a positive development from Stochastics is when %d rises from below 20 (the oversold level) and there is a positive divergence.

Interpretation Guidance for Lane’s Stochastics
Look at Stochastics for PEIX about March 15, 2006. Notice that %d rose from under 20. Notice the prices for that time were down. This is a positive divergence (indicator up and price still down) and a positive development. Would you have made a purchase of PEIX then? Maybe, but probably not. CCI was in the random-noise zone. OBV was waffling. TRIX was just turning green. DPO was still red. MACD was solidly red. The volume was red and low. ADX was on a long decline from over 50% down to 33% or so and still headed down. PDI/MDI was green, but coupled with a declining ADX that wasn’t a lot of positive indications.

So what use is Stochastics? It may be more useful as an exit indicator. Recall that 20 is the oversold level meaning the price could come back up. 80 is the overbought level meaning the price could come back down.

Look at April 7, 2006. %d crossed over 80 indicating an overbought condition. Should you sell? (You know the answer!) Take the signal as an opportunity to review the situation and maybe reduce your risk.

On April 5 and 6 there was either an In Neck Line or an On Neck Line candlestick pattern. Both are Bullish Continuation patterns indicating the rise should continue.

Or were those two candlestick patterns Meeting Lines or Dark Cloud Cover? Both of those are Bearish Reversal patterns! How would you adjust your risk in each case?

Stochastics did indicate a price drop, but the price recovered several times. Notice that May 14, 2006 %k x- %d while oversold and the next day commenced a steep drop. You should already have been cautioned by the May 10 cross over 80 into oversold condition and tightened your stops.

The May 10 close was $41.12/share. Setting a 10% ratcheting (ratchet means UP only) trailing stop would have been $37.00. The low of May 11 was $41.25 so you would still be holding.

The May 11 close was $42.39 so a 10% ratcheting trailing stop would have been $38.15, higher than $37.00 so you’d ratchet up.

The May 12 low was $39.79 so you would still be holding. The close was 42.00 was lower than the day before so you’d keep the $38.15 stop in place. Remember ratchet means UP only.

May 13 and 14 were a weekend.

The open of May 15 was $39.44 and the low was $36.61 so your stop would have been executed at $38.15, or as close as the market would allow.

Lets say your purchase was at the open on March 30, 2006 at $22.95/share. Selling at $38.15 would be a gain of $15.20 or over 66%. Unless the math is wrong that is the highest gain of any exit discussed in this document. The computation of eDays and ext is left as an exercise.

Proper interpretation of the Stochastic Indicator may best serve as a cautionary flag.

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Title Page Columnar Data

Hopefully you’ve reviewed the material above. Much of the information in the graphs and charts is presented in a numerical format on the title page. The left column is predominantly current information. The right column is mostly information as of yesterday’s close. More details on these items can be found by entering the term in the Search box in the upper right corner of our web site pages.

It is important to remember that this is not real-time data. We only update at about 2pm and after the close. If you request a TAG before the 2pm update the left column may be blank or all of the numbers shown as zero.

The company name and symbol are centered.

The Left Column (Column 1)

The left column (column 1) and the center column (column 2) are as of the date and time shown in the header that spans both column 1 and column 2.

Open: This is the opening price today.

High: This is today’s highest price.

Low: This is today’s lowest price.

Volume: This is today’s volume as of about 2pm or as of the close.

Current/SMA49: This is the current price divided by yesterday’s (see right column) SMA(49)(Closing Price) expressed as a percent. If this is a over 100% then the current price is higher than the 49-day moving average (good). If under 100%, then the current price is below the moving average (not so good).

Current/SMA199: Similar to above, but compared to SMA(199)(Closing Price)

Current/HIGH120: This is the current price as a percentage of the highest price in the last 120 days and shows how close the current price is to that potential resistance price. This will always be 100% or less.

Current/LOW120: This is the current price as a percentage of the lowest price in the last 120 days. This shows how close the current price is to that potential support price. This will always be 100% or higher.

Close to HIGH120: This is the difference from the price shown at the top of the center column (column 2) to the high price of the past 120 days in dollars.

Close to LOW120: This is the difference from the price shown at the top of the center column (column 2) to the low price of the past 120 days in dollars.

The Center Column (Column 2)

All items in column 2 are as of the date and time shown on the header over column 1 and 2.

Price: First in column 2 is a price. If the TAG was generated after closing this is the closing price. If the TAG was generated after the 2pm snapshot but before the close then this is the 2pm price.

HIGH120: This is the highest of the highs over the last 120 trading days.

LOW120: This is the lowest of the lows over the last 120 trading days.

ADX: The numerical value of the ADX.

ATR: The Average True Range expressed in dollars.

CCI: The numerical value of the Commodity Channel Index.

DPO: The numerical value of the Detrended Price Oscillator.

FEP2: The last fractal exit point expressed in dollars. Remember, FEPs are straight line segments. This number can be the same as yesterday’s, and the day before that.

HLI: The Hollinger Liquidity Index.

MACD DIVG: MACD Divergence, the numerical value for the difference between the MACD and the MACDSIGNAL. If the divergence is positive it is the value of the histogram above zero. If the divergence is negative it is the value of the histogram below zero.

RATR: The Relative Average True Range.

SMA(20)(Volume): The 20-day simple moving average of volume. If this is as of 2pm the volume as of 2pm is included as today’s volume.

SMA49: SMA(49)(Price), the 49-day simple moving average of closing price. If this is as of 2pm the price as of 2pm is included as today’s closing price.

SMA199: SMA(199)(Price), the 199-day simple moving average. If this is as of 2pm the price as of 2pm is included as today’s closing price.

TRIX DIVG: TRIX Divergence, the numerical value for the difference between the TRIX and the TRIXSIGNAL. If the divergence is positive it is the value of the histogram above zero. If the divergence is negative it is the value of the histogram below zero.

LSTOCH %k %d: Lane's Stochastics, these are numerical values for %k and %d which are graphed over time in the TAGS chart for Lane's Stochastics.

The Right Column (Column 3)

Information as of close (date) -- The information in the right column (column 3) is as of the closing on the date shown. This should be the trading date immediately preceding the date shown over column 1 and 2.

Closing price: This is the closing price as of (date) above.

HIGH120: This is the highest of the highs over the last 120 trading days.

LOW120: This is the lowest of the lows over the last 120 trading days.

ADX: The numerical value of the ADX.

ATR: The Average True Range expressed in dollars.

CCI: The numerical value of the Commodity Channel Index.

DPO: The numerical value of the Detrended Price Oscillator.

FEP2: The last fractal exit point expressed in dollars. Remember, FEPs are straight line segments. This number can be the same as yesterday’s, and the day before that.

HLI: The Hollinger Liquidity Index as of yesterday’s close.

MACD DIVG: MACD Divergence, the numerical value for the difference between the MACD and the MACDSIGNAL. If the divergence is positive it is the value of the histogram above zero. If the divergence is negative it is the value of the histogram below zero.

RATR: The Relative Average True Range

SMA(20)(Volume): The 20-day simple moving average of volume

SMA49: SMA(49)(Price), the 49-day simple moving average of closing price.

SMA199: SMA(199)(Price), the 199-day simple moving average of closing price.

TRIX DIVG: TRIX Divergence, the numerical value for the difference between the TRIX and the TRIXSIGNAL. If the divergence is positive it is the value of the histogram above zero. If the divergence is negative it is the value of the histogram below zero.

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ARCHIVED REPORTS

TAGs are not archived. They are generally available only after the close of the market to the next close of the market.

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NOTES

As we track more TAI we will update TAGs and these notes.

[Top] [PEIX PDF]