the black dot, followed by prices moving down to point @ and reacting back up to pointb. When a new high is not made at point 8, a resistance line (1R) can be drawn from theprior high / to the top of the latest move 8. A line parallel to 1R can be constructed at pointa, forming the initial downward channel. Price objective 1 is on the support lineof the newchannel (1S) and is used once the top at point b is determined. Price objective 1 cannot be
 
FIGURE 9-7 The channel width as a price objective.
 
       
PriceobjectivePRICE OBJECTIVES FOR BAts CHARTING 231
 
expected to be too precise due to the early development of the channel, If prices continueto point c and then rally to d, a more reasonable channel can now be defined using trend-lines 2R and 2S. The support line will again become the point where the new price objec-tive is placed. The upper and lower trendlines can be further refined as the new high andjow reactions occur. The primary trendline is always drawn first, then the new price objec-tive becomes a point on the parallel trendline.
Triangles and flags have objectives based on volatility in a manner consistent withother patterns. The triangle objective is equivalent in size to the initial reaction, whichformed the largest end of the triangle (Figure 9-9a). The flag is assumed to occur midwayin a price move; therefore, the objective of a new breakout must be equal to the size of themove preceding the flag (Figure 9-9b). Recalling the comments on the problems associatedwith the decreasing volatility of the triangular formation, the use of the first reaction as ameasure of volatility is a safe way to avoid those problems.
The Rule of Seven
Another measurement of price objectives, the Rule of Seven, is credited to Arthur Sklarew.'It is based on the volatility of the prior consolidation formation and computes three suc-cessive price objectives in proportion to one another. The Rule of Seven is not symmetricfor both uptrends and downtrends. Sklarew believes that, after the initial leg of a move, thedowntrend reactions are closer together than the reactions in a bull market. Because thedownside of a major bear market is limited, it is usually characterized by consolidation.Major bull markets tend to expand’as they develop.
To calculate the objectives using the Rule of Seven, first measure the length Z of the ini-tial leg of a price move (from the previous high or low, the most extreme point before thefirst pullback). The objectives are: *
2
1. In an uptrend:OBJ 1 = prior low + (L x 7/4)OBJ 2 = prior low + x 7/3)OBJ 3 = prior low + (Z x 7/2)
1 Sklarew, (See reference 8.)
 
FIGURE 9-8 Forming new channels to determine objectives.
NN First point of reversal
       
Priceobjective #1
   
Price enobjective #2 \232 CHARTING
 
—_——FIGURE 9-9 Triangle and flag objectives. (a) Triangle objective is based on the width of theinitial side, s. (b) Flag objective is equal to the move prior to the flag formation. |
 
objective
eo
 
{objective “ {fine “ {CY I.7 i77 ||lh ——-t-(a) , (6)
 
2. In a downtrend:OBJ 1 = prior high ~ x 7/5)OBJ 2 = prior high ~ (L x 7/4)OBJ 3 = prior high - (L x 7/3)
The three objectives apply most clearly to major moves, During minor price swings itis likely that the first two objectives will be bypassed. In Sklarew’s experience, regardlessof whether any one objective is missed, the others still remain intact.
CANDLESTICK CHARTS
For a technique that is reported to have been used as early as the mid-1600s, Japanese can-die charts were slow finding their way into the western method of analysis. In actuality,candle charts only differ from simple bar charts by shading the piece of the bar between_-the opening and closing prices—white if the close is higher than the open and black if theclose is lower than the open. The shaded area is called the body, and the extended linesare the shadows. With this simple change, we get an entirely new way of looking at andinterpreting charts, The patterns become much clearer than the western style of line chart.Over the centuries many of the candle formations have been_given names representingtheir significance (see Figure 9-10): -
Doji—in which the opening and closing prices are the same.
Hammer—a bullish reversal signal, showing the bottom of a swing, where the body isat the top of the candle, indicating an upward change of direction, and the shadow isbelow the body. The body may be black or white.
Hanging man—another bearish reversal pattern where the body of the candle repre-sents the high of a swing, and the shadow lies below in the direction of the reversal.The body may be black or white.CANDLESTICK CHARTS 233
 
 
FIGURE 9-10 Popular candle formations.
DO} HAMMERHigh High || |OrChee lollome. TN orbow Cove ne Black(a) (b)HANGING MAN SHOOTING STAR| T or Black L- White or Black(co) (9)BULLISH ENGULFING BEARISH ENGULFINGPATTERN -PATTERN
i ny
(e) (f)
 
Source: Jack D, Schwager, Schwager on Futures: Technical Analysis (John Wiley & Sons, 1996, pp. 281-288).
Shooting star—a bearish signal, also occurs at the top of a swing and has its body at thebottom of the candle with the shadow above. The body may be black or white.
Engulfing pattern—occurring at a swing high or low, has the current body engulfingthe entire prior candle.
Although these patterns are similar to western bar chart formation, none of them areexactly the same. The hammer, hanging man, and shooting star are reversal patterns butcan only be compared with the simple pivot point, where the middle day is higher orlower than the bars on either side, None of these candle formations would be a keyreversal or island reversal. The engulfing pattern is stronger than the typical outside day,because the spanning of the prior day’s range must be done only by the current day’sopen-close range.
The analysis of candle charts is a skill involving the understanding of many complexand interrelated patterns. For a brief review of this method, readers are referred to Schwa-ger on Futures: Technical Analysis; for full coverage, Japanese Candlestick Charting Tech-niques (New York Institute of Finance, 1991), and Beyond Candlesticks—New JapaneseTrading Techniques, both by Steve Nison, are recommended.234 CHARTING
 
Quantifying Candle Formations
The preciseness of the candle formations allows some patterns to be tested. One techniqueuses the shadows as confirmation of direction. We can interpret an increase in the size ofthe upper shadows as strengthening resistance (prices are closing lower each day); and anincrease in the size of the lower shadows represents more support. One way to look at thisis by defining
Upper shadow (white) = high — close Lower shadow (white) = open - lowUpper shadow (black) = high - open Lower shadow (black) = close — low
The sequences of upper and lower shadows can be smoothed separately using a movingaverage to find out whether they are rising or falling.’*
Another method for determining whether black or white candles dominate recentprice movement is to use only the body of the candle, B = close — open and apply a momen-tum calculation
ByBody momentum = ———2— x 100Bup + Baownwhere B,, is the sum of the days where B > 0 (body is white)Boown is the sum of the days where B < 0 (body is black),the number of days is recommended as 14.
When the body momentum is greater than 70 the whites dominate; when the value isbelow 20 the blacks dominate.
USING THE BAR CHART
Charting is not precise and the construction of the trendlines, other geometric formations,and their interpretation can be performed with some latitude. When using the simplesttrendline analysis, it often happens that there will be a small penetration of the channel ortrendline followed by a movement back into the channel. Some think that this inaccuracy,with respect to the rules, makes charting useless; however, many experienced analystsinterpret this action as confirmation of the trend. The trendline is not redrawn so that thepenetration becomes the new low of the trend, but it is left in its original position.
We must always step back and look for the underlying purpose in each method of analy-sis, whether technical or fundamental. In the case of the trendline we are trying to identifythe direction of prices over some time period. Chartists can use a simple straight line tovisualize the direction; they draw the uptrend by connecting the lowest prices in a risingmarket even though each point used may represent varying levels of volatility and uniqueconditions. The chances of these points aligning perfectly, or forecasting the perfect pricesupport level, is small. A trendline is simply a guide; it may be too conservative at one timeand too aggressive another; you’ll never know. Applied rigorously, charting rules shouldproduce Many incorrect signals but be right in the most important cases. The challenge ofthe chartist is to interpret the pattern of prices in context with the bigger picture.
Multiple Signals
Some of the impreciseness of charting can be offset with confirming signals. A simultane-ous short- and long-term trend break is a much stronger signal than either one consideredseparately. The break of a head-and-shoulders neckline that corresponds to a channel sup-
® Both shadow trends and body momentum are adapted from Tushar Chande and Stanley Kroll, The New Tech-nical Trader (John Wiley & Sons, 1994).USING THE BAR CHART 235
 
port line is likely to receive much attention. Whenever there are multiple signals converg-ing at, or near, a single point, whether based on moving averages, Gann, cycles, or phasesof the moon, that point gains significance. In chart analysis, the occurrence of multiple sig-nals at one point can compensate for the quality of the interpretation.
Pattern Failures
The failure to adhere to a pattern is equally as important as the continuation of that pat-tern. Although a trader might anticipate a reversal as prices near a major support line, abreak of that trendline is significant in continuing the downward move, A failure to stop atthe support line should result in setting short positions and abandoning plans for higherprices.
A head-and-shoulders formation that breaks the neckline, declines for a day or two,then reverses and moves above the neckline is another pattern failure. Postpattern activitymust confirm the pattern. Failure to do so means that the market refused to follow throughand, therefore, should be traded in the opposite direction. This is not a case of identifyingthe wrong pattern; instead, price action actively opposed the completion of the pattern.Wyckoff calls this “Effort and Results,” referring to the effort expended by the market toproduce a pattern that explains the price direction. If this pattern is not followed by resultsthat confirm the effort, the opposite position should be set.
Consider a trading day in which prices open above the previous close, move higher, thenclose lower. The expectation is for prices to open lower the next day. If an inside day or ahigher open follows, there is a strong sign of higher prices to come. As Thompson concludes,“A strongly Suggestive pattern that is aborted is just as valuable as a completed pattern.”
Change of Character
Thompson also discusses the completion of a pattern or price trend by identifying achange of character in the movement. As a trend develops, the reactions, or pullbacks,tend to become smaller. Traders looking to enter the trend wait for reactions to place theirorders; as the move becomes more obvious, these reactions will get smaller and the incre-ments of trend movement will become larger. When the reaction suddenly is larger, themove is ending; the change in the character of the move signals a prudent exit, even ifprices continue erratically in the direction of the trend.
A similar example occurs in the way prices react to economic reports or governmentaction. The first time the Federal Reserve acts to raise rates after a prolonged decline themarket is not prepared and bond prices react sharply lower. Before the next meeting of theFed the market may be more apprehensive, but is likely to be neutral with regard to expec-tation of policy, However, once there is a pattern of increasing rates following signs of infla-tion, the market begins to anticipate the action of the Fed. The sharp move occurs whenthe government fails to take action.
Testing Your Skill
Recognizing a pattern is both an art and a science. Not everyone has afi eye for patterns;others will see formations where no one else would. The first decision may be the mostimportant: How much of the chart do you use? It is perfectly normal for different timeintervals to show different trends. In some cases, arbitrarily cutting the chart at some pre-vious date might cause a clear trend to disappear. The price scale (the vertical axis) of thechart is another variable not considered by some chartists. When applying methods requir-
4 Jesse H. Thompson, “What Textbooks Never Tell You,” Technical Analysts of Stocks & Commodities (Novem-ber/December 1983).236 CHARTING
 
ing specific angles, the chart paper is expected to have square boxes. Regardless of theshape of the box, the formations will appear very different from one piece of chart paper,or computerized page, to another.
The timeliness of the pattern identification is the most serious problem. Can the for-mation be interpreted in time to act on a breakout, or is the pattern only seen afterward?At different stages of development, the lines may appear to form different patterns. Beforeusing your charting skills to trade, practice simulating the day-to-day development ofprices as follows:
1. Hold a piece of the paper over the right side of the chart, covering the most recentmonths, or better still, have someone else give you the partial chart.
2. Look at the chart and analyze the formations.
3. Determine what action will be based on your interpretation. Be specific.
4. Move the paper 1 day to the right, or have someone else give you the next day’sprice.
5. Record any orders that would have been filled based on the prior day’s analysis.Don’t cheat.
6. Determine whether the new day’s price would have altered your formations andplans.
7, Return to step 3 until finished.
This simple exercise might save a lot of money but may be discouraging. With practiceyou will become better at finding and using formations and will learn to select the onesthat work best. Very few traders base their trading decisions entirely on bar charts. Manyrefer to charts for confirmation of separate technical or fundamental analysis; others willonly use the most obvious major trendlines, looking for points at which multiple indica-tors converge. The general acceptance of bar charting analysis_and the need for visualiza-tion makes it a lasting tool.lO
Volume, Open Interest,and Breadth
 
futures markets, It is a valuable piece of information that is not often used, and one
of the few items, other than price, that is traditionally considered valid data for thetechnician. Nevertheless, there has been little research published that relates this factor tofutures markets; its popular use has adopted the same conclusions as in stock marketanalysis.
The stock and futures markets have two other measures of participation that arerelated, yet not the same. In equities, the large number of shares being traded allow formeasurements of breadth, In the same way that the stock index has become a popularmeasure of overall market trend, the breadth of the market is the total number of stocksthat have risen or fallen during a specific period. When you have the ability to view the big-ger picture of market movement, breadth seems to be the natural adjunct to the index.
In futures, open interest is the measurement of those participants with outstandingtrades; it is the netting out of all open positions in any one market or contract, and it givesan understanding of the depth of volume that is possible. A market that trades only 10,000contracts per day, but has an open interest of 250,000, is telling the trader that there aremany participants who will enter the market when the price is right. These are most likelyto be commercial traders, using the futures markets for hedging.
Vie pattern has always been tied closely to chart analysis in both the stock and
CONTRACT VOLUME VERSUS TOTAL VOLUME
In futures markets, in which individual contracts specify standard delivery months, the vol-ume of each contract is available, along with the total volume of the market; that is, thetotal volume of all individual contracts. Spread transactions are not included in volume.This information is officially posted one day late, but estimates are available for many mar-kets during the day. Total volume of crude oil is estimated every hour and released to on-line news services. .
Individual contract volume is important to determine the delivery month that is mostactive, Traders find that the best execution fills are most likely where there is greatest liq-uidity. Analysts, however, have a difficult time assessing volume trends because there is anatural increase in volume as a contract moves from second month out to the nearby andtraders shift their positions to the closest delivery month; there is a corresponding declinein volume as the delivery date becomes close. Looking only at the volume of one deliverymonth is equivalent to ignoring seasonality in an agricultural market.
Each futures market has its unique pattern of volume for individual contracts. Some,such as the interest rates, shift abruptly on the last day of the month prior to delivery,because the exchange raises margins dramatically for all traders holding positions in thedelivery month. Currencies are very different and tend to trade actively in the nearestmonth up to one or two days before that contract goes off the board. While volume238 VOLUME, OPEN INTEREST, AND BREADTH
 
increases slightly in the next deferred contract, anyone trading sizable positions will needto stay with the nearby contract to the end.
Other than for determining which contract to trade, and perhaps the size order thatthe market can absorb, an analysis of volume as discussed in this chapter must use totalvolume, the aggregate of all contracts, to have a data series that does not suffer the patternsof increasing and decreasing participation based on the coming and going of individualdelivery months. When traders roll from the nearby to the next deferred contract, thetransactions are performed as a spread, and those trades are not included in the volumefigures. Because positions are closed out in one contract and opened in another, there isno change in the open interest.
The stock market equivalent to using total volume would be to add the volume for allstocks ina similar group. This would help smooth over those periods when the volume ofone stock is very low. If the group is not highly correlated in price movement, the endresult might be a volume series that has very little to do with the stock you are trading.
TickVolume
The popularity of quote machines and fast trading requires a measurement of volume thatcan be used immediately to make decisions. Because total volume is not available on atimely basis to day traders, tick volume has become a substitute. Tick volume is the num-ber of changes in price, regardless of volume, that occur during any time interval. Tick vol-ume relates directly to actual volume because, as markets become more active, priceschange back and forth more often. If only two trades occur in a 5-minute period, then themarkets not liquid, regardless of the size of the orders that changed hands. From an ana-lytic view, tick volume gives a reasonable approximation of true volume and can be used asa substitute. From a practical view, it is the only choice. Tick volume patterns are discussedlater in this chapter.
VARIATIONS FROM THE NORMAL PATTERNS
One final note of warning when using volume indicators to confirm price direction: mar-kets have patterns in volume that cause the same effect as seasonality. To decide that a buysignal is more important because it came near the end of the trading day, when volume wasmuch higher than midday, is not correct because volume is always higher at the beginningand end of the day. You may conclude, in general, that those two periods produce morereliable trading signals; however, a volume confirmation must be compared against thenormal volume for that time period.
Open interest and market breadth also have seasonal patterns. In agricultural markets,farmers hedge in larger numbers during the growing season than in the winter, raising theopen interest. In stocks, there is.a lot of activity associated with the end-ofyear positioningfor tax purposes, and traditional rallying during holiday seasons. While this predictablemarket activity may be enough to confirm your positions, it does not indicate that some-thing special is occurring. Identifying these variations will be discussed in detail later inthis chapter.
Volume Drops and Spikes
Volume spikes are carefully watched because they are seen as a significant positive actionby the traders. For a stock that has been relatively inactive, a volume spike is a warning thatsomething is changing. In futures, a day of very high activity means that the market is sen-sitive to news. In both cases, a sharp increase in volume can be a predictor of change, or atleast of higher volatility. This will be discussed in the section “Volume as a Predictor ofVolatility,” later in this chapter.STANDARD INTERPRETATION 239
 
At this time it is worth remembering that a volume spike is a clear indicator of a posi-tive action, while a volume drop can be ambiguous. Volume can decline because there islittle interest in a stock or furures market; buying and selling pressure have been elimi-nated. When a currency, gold, or any traded product reaches a price that is considered fair(also called equilibrium), volume normally declines. Volume may also drop on the daybefore a holiday, or just by chance. While there are seasonal and other predictable patternsassociated with volume drops, they are far less certain than large increases.
STANDARD INTERPRETATION
The interpretation of yolume has been a part of market lore since charting began. The bestconsolidation of that information was published in the monograph by WL. Jiler, Volumeand Open Interest: A Key to Commodity Price Forecasting, a companion piece to his mostpopular Forecasting Commodity Prices with Vertical Line Charts (see references in Chap-ter 9 (“Charting”).
In both the furures and stock markets, volume has much the same interpretation,when volume increases it is said to confirm the direction of prices. Price changes that occuron very light volume are less dependable for indicating future direction than those changesassociated with relatively heavy volume. An additional uncertainty exists for stocks that arenot actively traded, and for low prices shares where the total dollar volume can be small.In these cases it might be best to look at the accumulated volume of similar companies, orits sector.
Open interest is a concept unique to futures markets, but helps to explain the depthof the market as well as trader expectation. New interest in a market brings new buyers orsellers, which increases the open interest, the net of all outstanding contracts being traded.When the open interest increases while prices rise quickly, it is commonly interpreted asmore traders entering long positions. This may seem strange because for every new buyerof a furures contract there must be a new seller; however, the seller is likely to be someonelooking to hold a position for a few hours or days, looking to profit from the normal upsand downs of price movement. The position trader, who is willing to sit for much moretime holding a long position, is the one who is attributed with the open interest. In reality,no one knows. However, if prices keep rising, the shorts are more likely to be forced outwhile the longs have staying power.
The traditional interpretation of changes in volume and open interest (for futures mar-kets) can be summarized as follows:
 
 
Volume Open Interest Interpretation
Rising - Rising Confirmation of trend
Rising Failing Position liquidation (at extremes)Falling Rising Slow accumulation
Falling Falling — Congestion phase
Some of the generally accepted notions for the use of volume and open interest are:
1. Open interest increases during a trending period.
2. Volume may decline but open interest builds during an accumulation phase. Vol-ume occasionally spikes.
3. Rising prices and declining volume/open interest indicate a pending change of di-rection.240 VOLUME, OPEN INTEREST, AND BREADTH
 
In the stock market, when confirming the direction of the overall market, the breadthof trading (percentage of rising to total stocks) should be used if it closely approximatesthe stocks in the index. It would be inconsistent, for example, to use the total breadth ofall stocks traded on the New York Stock Exchange, to confirm a move in a portfolio thatcontained only the 30 stocks of the Dow Industrials. In that case, you would need to con-Struct an indicator of breadth that used only those 30 stocks.
Exceptions
No method is without exceptions, including volume patterns in the stock market. Thereare days or periods when volume is expected to change, and must be considered in theanalysis. For example, volume is lighter:
On the first day of the weekOn the day before a holidayDuring the summer
It is equally difficult to forget that volume is heavier on triple witching day, when S&P 500futures, options on futures, and options on the cash index all expire at the same time.
In the futures markets, there are similar patterns. Lighter volume will exist during hol-iday periods and summer months, but may be heavier on Fridays and Mondays during atrending market or a weather market for agricultural products. Liquidation often occursbefore the weekend, and positions are reentered on the first day of the week.
Richard Arms’s Equivolume
Most of the techniques for using volume discussed in this chapter will multiply or accu-mulate volume, creating an index that rises faster as volume increases. Equivolume, acharting method introduced by Richard Arms, takes the unique approach of substirutingvolume for time along the bottom scale of a chart. When volume increases, the price baris elongated to the right, rather than the standard approach of extending the height ofthe bar.
There are no systematic methods for using this technique included here, and applica-tions parallel standard chart interpretations; however, analysts can represent this type ofchart by creating a new price series in which the daily closing price is repeated based onthe relative volume. For example, if the normal volume day causes a closing price to befepeated 10 times, then a day with twice the volume will repeat that price 20 times, and aday with half the volume will show 5 prices. This approach may cause a short-term movingaverage trend to look strange; however, a linear regression or long-term trend shouldreflect the importance-of varying time.
VOLUME INDICATORS
Both the stock and futures markets are familiar to indicators that use only volume, or thosethat add volume, intending to make other calculations more robust. The following sectiongives the most popular of these indicators, most of which originate in the stock market andmany of which use the number of advancing and declining stocks. Readers should note theway in which the data is used from one technique to another and consider the significanceof these changes. They will be discussed at the end of this section.
Volume Momentum and Percentage Change
The most basic of volume indicators are momentum and rate of change. These techniquestreat volume as price. For momentum, this means finding the change in volume over a spe-VOLUME INDICATORS 241eencific time interval; percentage change measures the size of the volume change relative tothe starting value.
Volume Momentum = volume today — volume,.gays ago
volume today — volume, days ago
Volume % =VOLUME jdays ago
On-Balance Volume
Made famous by Joseph Granville, On-Balance Volume (OBV)' is now a byword in stockanalyst circles. On days when prices close higher, it is assumed that all volume is repre-sentative of the buyers; on lower days, the volume is controlled by the sellers. Althougheach day yields a new value, these values are added together to form a new series. Theresult is a volume-weighted series. In the following formula, the expression in parenthesessimply uses the closing prices to produce a value of +1, 0, or -1, which then determineswhether today’s volume will be added or subtracted from the volume series:
close — close previous
OBY, = OBV previous + | ST‘oday previ (aa = Close previous)
) x volume
Determining the OBV manually is a simple accumulation process. In Table 10-1, there wasgreater volume on days in which prices rose and lower volume on declining days. This isexpected in a market with a clear uptrend. The advantage of recording the OBV is inobserving when the trend of the prices diverges from the OBV values. The general inter-pretation of OBV is given in Table 10-2.
Because a volume series has many erratic qualities, caused by large variations in vol-ume from day to day, it is most often used by applying a trend from 1 to 100 weeks, thenidentifying a simple volume direction when the OBV value crosses the trend. An upwardtrend in volume is interpreted as a confirmation of the current price direction, while adownturn in volume can be liquidation or uncertainty.
Simple Variation
An indicator that closely resembles On-Balance Volume is a running total of the days whenvolume increases minus the days when volume delines. That is, add 1 to the cumulativevalue on a day when today’s volume is greater than the previous day, otherwise subtract 1.This volume count indicator (VCI) can be written as:
‘ Robert W. Colby and Thomas A. Meyers, The Encyclopedia of Technical Market Indicators (Dow Jones-Irwin,1988) is a comprehensive study of most market indicators, including On-Balance Volume and some other tech-niques included in this section.
 
TABLE 10-1 Calculating On-Balance Volume
Closing Daily Volume On-BalancePrice (in 1,000s) Volume310 25 2531S 30 55318 27 82316 1S 67314 12 $5
320 28 83242 VOLUME, OPEN INTEREST, AND BREADTH
 
 
TABLE 10-2 interpreting On-Balance Volume
 
 
Price OBVDirection Direction InterpretationUp Up Clear uptrendSideways Moderate uptrendDown Weak uptrend near reversalSideways Up Accumulation period (bottom)Sideways No determinationDown Distribution period (top)Down Up ‘Weak downtrend near reversalSideways Moderate downtrendDown Clear downtrend
 
volume,oasy — VOIUME previous
VCI, = VCI, +‘otay preven’ " @abs (volume oday — VOIUME previous),
Volume Accumulator
A modification to Granville’s OBV system is Mark Chaiken’s Volume Accumulator (VA).Instead of assigning all the volume to either the buyers or the sellers, the Volume Accu-mulator uses a proportional amount of volume corresponding to the relationship of theclosing price to the intraday mean price. If prices close at the high or low of the day, all vol-ume is given to the buyers or sellers as in the OBV calculation.’ If the close is at themidrange, no volume is added.
close — lowVAtoday = WAprevious + (sesemee - 50] x 2 x volume
Other Accumulation Index Techniques
The Price and Volume Trend (PVT) applies volume to the percentage price change fromclose to close, which can be positive or negative. The Positive Volume Index (PV1) and Neg-ative Volume Index (NV}) take the approach that a single indicator, which adds and sub-tracts volume based on market direction, is not as informative as two separate series thatcan be viewed at the same time.
close — close previous
x volumeCLOSE previous
PVT yoday = PWT previous + (
if close > clOS€previous then PVEroday = PVEprevious + Volume
if close < ClOS€previous then" NVIjoday = NVIprevious + Volume
Separating Advancing from Declining Volume
The most basic of all techniques for determining market breadth is the Advance-DeclineIndex, which creates a new series by adding the net of the number of advancing and declin-ing stocks each day. Unchanged issues are ignored.
? Both OBV and the Volume Accumulator are characterized as momentum systems. See Chapter 6 for more infor-mation on similar techniques.