TREND INTENSITY INDICATOR
Behavioural analysis plays a critical role in assessing share price movements. Stockradar offers consistent and standardised measurement of investor behaviour using its unique tool, the Trend Intensity Indicator.
The Trend Intensity Indicator combines and weighs four simple tools: trend, volume, moving averages and price momentum. This generates an invaluable benchmark that highlights only those stocks with compelling trending qualities that offer the best prospects for sustained price movement.
The motivation for designing an indicator evolved from a realisation that fundamental analysis was not necessarily providing all the answers, nor explaining many share price movements.
Price analysis is the examination of a company’s share price. At any one point in time buyers and sellers agree on a market price, which is a direct reflection of market sentiment and drives the share price.
Fundamental and price analysis are two entirely separate moving targets that very often diverge, but it is movement in the share price which we are most interested in, and which we profit from.
The “sentiment” factor can drive prices far from fundamental value. Unexpected news of such events like profit downgrades can be dealt harshly by the market and drive prices well below fundamental value. In contrast, future expectations can build prices to unrealistic levels far beyond fundamental value. This is what makes the Biotech sector such a burial ground of shattered dreams – so many expectations. And of course, the Internet bubble was built almost entirely on sentiment with little consideration for value at all.
Sentiment is a powerful force, and an understanding is essential to successful stock market trading and investing. The difference between a stocks fundamental valuation and its share price could be explained as the “sentiment” factor.
HOW DO WE MEASURE SENTIMENT?
To initiate analysis using the Trend Intensity Indicator a definition of trend is first established. A stock, which moves in a sequence of higher highs and higher lows, is defined as having an uptrend. At the point that this sequence begins, i.e. when it changes from a downtrend of lower highs and lower lows, we consider the trend reversed.
Only weekly reversals are employed in our approach. The basis for this rule is that a weekly trend change avoids daily market noise, is a reliable medium term indicator, and provides a clear and objective view of market sentiment.
Once a stock fulfills a simple trend definition, our Trend Intensity Indicator then rates the power of that trend and establishes a clear view of market sentiment towards it, or against it.
The Trend Intensity Indicator calculates a single value from a “basket” of sentiment indicators.
|investor participation/non participation
|for averaging probabilities
|to define the power of the crowd behaviour
By taking each indicator and breaking it down to the most basic signals we provide a value for the state each indicator is in. For trend, it is either up or down which then receives a negative or positive value reflecting that state. This is then weighted in to the end result, its Trend Intensity Rating.
Of the other three indicators we ask the question: Does volume support the rise? Where is the price in relation to its moving average? And is price movement attracting positive crowd behaviour, as measured by our price momentum indicator?
Following we show the indicators we have used for calculating the Trend Intensity Indicator and their different states. This objective rule based approach can be applied to any number of indicators and combinations but the approach must abide by qualified rules of analysis. As a commercial enterprise the actual values and calculations that generate the Trend Intensity Rating for each stock are proprietary to Stockradar. However you can easily make you own calculations by giving each indicators status a value. By simply weighting in each positive or negative value we arrive at, in this case, a rating between 10 and –10.
TREND INTENSITY INDICATOR
|a. Trend Up – Positive
|Higher Highs and Higher Lows
|b. Trend Down – Negative
|Lower Lows and Lower Highs
|a. Volume Bullish – Positive
|Volume Expanding & Price Rising
|b. Corrective in up trend – Positive
|Volume Contracting & Price Rising
|c. Volume Bearish – Negative
|Volume Expanding & Price Falling
|d. Corrective in down trend – Negative
|Volume Contracting & Price Falling
|3. MOVING AVERAGE – (28 day XMA)
|a. Moving Average – Positive
|Price > XMA
|b. Moving Average – Negative
|Price < XMA
|c. Moving Average – Neutral
|Prices closes once above/below XMA
|4. PRICE MOMENTUM – MOVING AVERAGE CONVERGENCE/ DIVERGENCE INDICATOR (MACD)
|a. MACD – Positive
|MACD lines > 0, MACD Histogram Rising and > 0
|MACD lines > 0, MACD Histogram Rising and < 0
|MACD lines > 0, MACD Histogram Falling and > 0
|MACD lines > 0, MACD Histogram Falling and < 0
|e. MACD – Negative
|MACD lines < 0, MACD Histogram Falling < 0
|MACD lines < 0, MACD Histogram Falling > 0
|MACD lines < 0, MACD Histogram Rising > 0
|MACD lines < 0, MACD Histogram Rising < 0
The Trend Intensity Indicator calculation generates a stock rating between 10 and –10. The highest value of 10 reflects a consensus agreement by all indicators that all positive sentiment rules have been satisfied and the stock rates at a maximum on the Trend Intensity scale. The lowest value of –10 reflect consensus agreement from all indicators that no conditions have been met that suggest a stock has any positive sentiment towards it.
A stock that reverses its trend to up and has a Trend Intensity Rating of 4 or greater will qualify as a Stockradar Stock Pick, and a stock that has compelling trending qualities, and offers the best prospects of price movement. Alternatively, a stock that reverses its trend and has a Trend Intensity Rating of –4 or less will be disqualified from Stockradar’s Stock Picks as a stock that has lost its trending qualities. This breaks the market down into two distinct groups of stocks. One that is trending, or one that is not. Our focus is on up trending stocks only.
TREND INTENSITY INDICATOR RATING SCALE
|10 to 7
|Trending up strongly
|6 to 4
|3 to –3
|–3 to –6
|–6 to –10
|Trending down strongly
Stockradar’s coverage is of the ASX/200. Weekly results are presented each Monday with our recommended Stock Picks at Stockradar.com.au. Our weekly Stock Picks are supported by a Stock Alert facility that scans the market daily, targeting stocks that are moving in and out of their trends. Along with specific stock analysis, the Weekly Sector Update takes on a thorough review of a market sector. Published bi-monthly our free newsletter features a selection of market highlights.
For more information we invite you to visit our website where you can see the Trend Intensity Indicator in action. In a real time environment we demonstrate the practical application of the Trend Intensity Indicator when complimented by a well-planned trading strategy.
Richard Lie is an independent research analyst with 40 years of market experience