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Strategies & Market Trends : A.I.M Users Group Bulletin Board

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To: Linda Kaplan who wrote (3702)	12/30/1997 2:20:00 AM
From: Bruce A. Bowman	Read Replies (1) of 18928

Hi Linda- Keep in mind that I'm really winging it here. I always get in trouble when I try to interpret someone elses work. What it appears Value Line does to arrive at the Hi-Low apx value is compute: -1 * (52-Wk High delta + 52-Wk Low delta) = Hi-Low apx The 2 delta values are in %, the High value is always negative number, and the Low value is always positive. What they get from this sum is a "figure of merit" which is a number that may not have any theoretical basis, but empirically has proven to be of value in identifying stocks with potential for movement over the next umpty-ump months. In essence, the further price is from the 52-wk high and the closer to the 52-wk low, the larger the Hi-Low apx value and the greater the potential for price to move back toward the 52-wk high. Similarly the closer price is to its 52-wk high and the farther it is from the 52-wk low, the smaller (and possibly more negative) the number will be, representing the least potential for upward movement. It might even be that the more negative the number is, the greater the potential for correction. My thought was that this empirical value (which is a %) might prove to have value in scaling the IW recommendation for starting a new AIM account. You'd take the Hi-Low apx value, multiply by -1 and arrive at a correction factor to apply to the IW recommendation. Tom's FAQ discusses this same thing but presents it in terms of using 52-wk hi/lo range and computing the cash reserve needed for a new account. This accomplishes the same purpose but uses the VL numbers applied to the IW. The reality is that Tom has validated his method while my own ravings are based solely on arm-waving assumptions. Intuitively they both seem to point you in a similar direction, but who knows how right this VL correction factor is 'till you've gone thru a market cycle or 2. Incidently, I originally thought that VL had screwed up by not using the price range from 52-wk high to 52-wk low and computing the current price as a % of distance from the mid-point. But after I thought about this awhile, I realized that using my approach to compare 2 stocks that each had a 52-wk hi = $100 where one had a $1 range from hi to low and which is currently sitting 1/4 point above its low would have the same value as a stock with a $100 range sitting $25 off its low. Using the VL method these 2 hypothetical cases would look immensely different from one another. The VL calculation resolves the ambiguity of stocks with significantly different price range. That's what really caught my eye. Anyway... hope this clears things up to at least the consistency of mud! :-) Bruce

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