Hello Challo,
>>Eric, I'm a little confused . <<
Me too!! With everything!
In my reference to the DJIA -- that particular one is a Bullish Percent Index. The Overbought/Oversold Indicator is just something I'm experimenting with. As a point of background, here's a recent post discussing that matter:
To: Paul V. (10452 )
From: Eric Stevens Sunday, Nov 29 1998 2:17AM ET
Reply # of 11632
Hello Paul,
I know your question is directed to Tom but I was just updating my so called overbought/oversold (O/O) Excel generated indicators dealing with this subject and thought you might find it of interest.
I find the whole O/O subject very interesting. I'm tracking a number of issues and indexes with 3 different O/O indicators based on 50 day moving averages to see if they can help me make a buck. (Yes we all know about Stoch and RSI but that's another subject.)
The first one is based on standard deviation, the second is what I call the Dorsey Indicator and the third is what I call the Birinyi Indicator. As I mentioned all are based on a 50 day moving average.
The standard deviation is the simplest and Excel does all the work.
The Dorsey Indicator is a bit more complicated. All though Tom references a bell curve and standard deviations as a way to explain the BOT, MED, and TOP on his charts, I have found through Excel experiments that I'm much closer to tracking his numbers if I use weekly high and low ranges and from that create a volatility factor and double it and then use a 10 week average.
The Birinyi Indicator is the one I find the most interesting right now. The reason is you use a 50 day moving average, and then look back one full year at the highest and lowest that a stock or index has traded, as a percentage, above or below the average. There's no guessing or estimating in this indicator. As an example, the DJIA 50DMA is at 8444. The highest the DOW has traded above its 50DMA in the past year of trading is 12.7%, and the lowest is 16.1%. As of Friday the Dow was 11.4% above its 50DMA, or 82% overbought. Its top is 9519 and the bottom is 7083. (These are daily numbers and they change with different smoothing numbers like 5 or 10 dma.)
What I'm currently posting is the daily data. No smoothing. I thought that later I would start showing a weekly smoothed.
Also, one must recognize that 10 TA types will/would give 10 different answers to how to measure OB/OS and a number of them would find the whole discussion of no value, as they don't believe in the idea.
Here's what Birinyi had to say on August 13, 1998 when he spoke at the New York Society of Security Analysts. The title of his speech was The Failure of Technical Analysis.
Two things that we do and we think are very helpful. The 1st is sentiment. On page 7 we have a copy - this is what we put out everyday for ourselves and our trading clients. It's an overbought/oversold indicator. Again it just tells us the lay of the land and the geography. It tells us that Coke currently is very oversold. It doesn't tell us that it's going to go up 10%, it doesn't tell us that it's going to go back to the 50-day line. It just says look; this stock is flat on its bottom. On the other hand, a stock like Apple, or Texas Instruments is near the top end of its trading range. If you buy Texas Instruments here as an investment, as opposed to a day trade, you're really not likely to make any money. You're crossing against the red light. Yes, you might get lucky. But the stocks on the right side, especially those bumping up against the top end of their overbought perimeters, and I won't go into all that, but they are bumping up against their top end. There you're trying to fill an inside straight. And once out of every 12 times you'll be lucky.
So, as an example, on September 15th, when the New York Stock Exchange Bullish Percent Index reversed up to Bull Alert and said "Get back on the field" (and the overwhelming sentiment was bearish) the Birinyi Indicator was 40% oversold. And what was the trend doing? The 5, 13, and 40 were all moving up. So, I followed the chart (NYSEBP) that took me to the dance -- and laughed all the way up.
I guess Challo that I'm somewhat enamored at the moment with the whole OB/OS idea. Combining them with simple old trends seems to help.
So what about today? Well -- all our major Bullish Percent Indexes have reversed down. The trend lines are not going the right way but the DJIA OB/OS indicator is looking good. Is that enough?
Take care,
Eric |
