Number
12
Please note that
we have used historical data. These examples are
for educational purposes only.
Commodity
Channel Index & Price and Volume Trend
In this
issue of the ChartFilter newsletter we'll look at
a couple of useful, complimentary indicators; the
Commodity Channel Index (CCI) and Price and Volume
Trend (PVT).
We're experiencing
extremely volatile markets during the first days
of the new Millennium! The Dow is up 300 points
one day and down 250 the next. Every move seems
to be an overreaction to some new economic data,
earnings expectations or unsubstantiated rumour.
Oscillators
are useful technical indicators during tumultuous
times. As John Murphy writes, "The oscillator provides
the technical trader with a tool that can enable
him or her to profit from these periodic sideways
and trendless market environments. The oscillator
can also warn that a trend is losing momentum before
that situation becomes evident in the price action
itself. Oscillators can signal that a trend may
be nearing completion by displaying certain divergences."
The Commodity
Channel Index is an oversold/overbought oscillator
designed to identify the beginning and the end of
commodity market cycles by Donald Lambert. It has
also proven effective for other markets.
The Price
and Volume Trend is a volume indicator. It plots
a cumulative total of volume adjusted according
to relative changes in closing prices. It is similar
to On Balance Volume (OBV).
By
using the two indicators together we have the benefit
of an oscillator as well as an indicator that incorporates
volume data. I find they work well together in providing
overbought and oversold signals.
CURRENT
TRENDS - Learning from the S&P 500
The
S&P 500 has been in the same turbulent waters over
the past few months as the other leading indices.
The S&P has been in a strong downtrend since September
2000. It looks like PVT is offering some early signs
of a possible oversold market, and at least a short-term
trend reversal. Will CCI offer confirming signals...?
Let's take a look at the current chart.
In the chart
above we can see that PVT has made a sharp drop
to the bottom of its chart. Let's take a look at
some historic charts to see what this signal can
tell us... The chart below shows the S&P in 1998,
and illustrates the signal we're looking for with
CCI & PVT working in partnership.
The
CCI & PVT signals
What followed
in this market after this oversold signal was given?
Take a look at the chart below:
What's the
lesson? When both PVT and CCI drop sharply in unison,
you have a strong oversold signal, and a good likelihood
of at least a short-term trend reversal, and likely
something long-term. Please note that this is not
the typical interpretation of PVT (although it is
for CCI), however, I've found this combination to
be very useful in volatile markets.
TIPS
& TECHNIQUES - Using CCI & PVT
CCI compares
the current mean price with the average mean price
over a period of usually 20 days. As CCI moves upwards
towards +100, it indicates the price is increasingly
high compared to average prices. As the CCI drops
towards -100, it indicates that the price is increasingly
low compared to average prices.
PVT is calculated
by adding a percentage of the volume when prices
close up and subtracting a percentage of volume
when the prices close down. The amount of volume
added or subtracted to the PVT is relative to the
amount that prices rose or fell compared to the
previous day's close.
For more
detailed information see the ChartFilter reports
on CCI & PVT
at ChartFilter.com. In particular, you will see
how to look for divergence between the price and
PVT.
