Thoughts on EquiVolume Charts

Jun 21, 2007: 6:53 PM CST

I admit that I have not studied EquiVolume Charts extensively, so I wanted to give a brief overview and cite some relevent sources for further study.

What differentiates an EquiVolume Chart from a standard Candle or Bar chart is the fact that the volume data is factored into the shape of the ‘bar’ or box, such that days with high volume will have expansive (long width) boxes and days with low volume will be narrow (thin). The price height will be determined solely by the high and the low of the day, and does not take into account the close (as pure EquiVolume Chartists believe the ‘close’ is a mere trade in the day and is less important than the high or the low). These form the basic differences with any other method of standard charting.

We know that retracements in trends should occur on low volume and breakouts from consolidation should occur on high volume. This can be seen in standard volume histograms, but when the information is encoded with the price boxes/bars, sometimes this information will ‘pop-out’ at us for easier viewing. Sometimes EquiVolume Charts allow us to anticipate price swings and retracements better.

For a basic definition and examples of EquiVolume Charts, see this link from MarketScreen.

The ArmsInsider provides a bit more detail in its basic explanation.

This source from Incredible Charts provides open/close data to enhance standard EquiVolume Charts.

StockCharts.com provides a simple way to view EquiVolume Charts – simply select it in the “Type” box to pull up stocks in this new view.

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These are just two examples I came across recently.  These charts can also be of assistance to find ‘bottoming’ patterns like a saucer and can even help identify head and shoulders patterns.

They will work just as well on weekly frames – I am showing daily charts above.

If you’ve never viewed one of these charts, it can help you to do so if you have a few spare moments.  Again, how we view and interpret data helps us with our edge and profitability in the market.  I don’t think many people use these types of charts and if they ‘speak to you,’ then they may be helpful in this regard.

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Bonus Educational Charts June 20

Jun 20, 2007: 5:05 PM CST

Here are a few bonus charts for your education:

Potash (one of my darlings)

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We were stopped out of a 7+ day swing trade in Potash today when price was identified as ‘parabolic’ and we began trailing a stop beneath yesterday’s low which worked until today, and this method saved about $2.00 of profit that would have been lost without the stop. As mentioned earlier, Potash has a strong fundamental foundation and beautiful technicals. My only concern – and should be yours too – is that this stock is becoming “too popular” in the media and financial publications. I suggest looking elsewhere for large gains because the “fade the crowd” mentality is becoming too tempting on this stock. I plan to discuss more on how to trail a tight stop in a ‘runaway’ position.

Google (a darling of many option traders)

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Google fell just shy of the initial target for the “Impulse Buy” set-up trade. Notice the strong new momentum high and corresponding price high that set-up the entry when price fell to the rising 20 SMA. The initial target was the most recent swing high. Many analysts say that Google will stay above 500 now that it has clearly breached that level. I have friends playing options spreads on this theory (and profiting, as of June’s expiration). Worth a thought.

Wal-Mart (WMT – a darling of many retail shoppers… who don’t mind long lines)

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I admit it’s not often we get impulse buy signals from steady Wal-Mart, but we have a potential set-up if you want to consider it for further study. The large buy impulse (momentum) has caught my attention and the pullback has been orderly as far as I can tell. Stochastic is registering a buy and price could find support at the flattening 50 EMA. No matter what happens, you have a tight risk/reward should you enter immediately. You would risk around 50 cents to play for a profit at $51, or $2.50, making your risk/reward 1 to 5. This assumes price retests the most recent swing high, of course. Do you think it’s worth 50 cents to find out?

Ford (a darling of those who love to go short… until now?)

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We are seeing massive triangulation (technical term: ascending right triangle) and contraction of price in Ford Motor Company. Price is expected to ‘eject’ out of this contraction zone either to the upside or the downside. I’d bet on the upside, but it’s best to establish a position once price has exited the triangle and retested back for a cleaner entry with less risk. Betting on price ejection is dangerous if you’re wrong (especially if momentum forces strong gaps against you). Often these things resolve in the opposite direction of which most people anticipate, and that’s exactly why failure patterns are more profitable and more violent than ‘proper’ patterns.

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Mid-Week Market Overview for June 20

Jun 20, 2007: 4:05 PM CST

Today did some technical damage to the major indexes, with the Dow being spared breaking its 20 period moving average, as the other indexes have done.

We are seeing possible unwinding of developing momentum divergences in many of the indexes (especially the Dow). We also see price rejection in the indexes as well as we retest new highs and set-up failure patterns that are wrecking many stocks at the late stages.

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The Nasdaq was the only of the four major indexes to make new price highs, yet today’s action unequivocally rejected the new highs, leading to established overhead resistance that must be overcome by fresh buying pressure soon (if it occurs).

Nothing was spared today in the sector view, although the good news was that high-flying Energy was hit the hardest (3%).

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I won’t post the industry chart, but everything was red except for two industries: Retail (+0.52%) and Airlines (+1.42%).

The Utilities industry (-2.54%) was hit the hardest with Oil (2.48%) not far behind. In terms of sector rotation theory, this is usually good news for the overall market.

Of special note, agricultural prices, especially corn, were hit hard today, with aggregate losses exceeding 3% in one day. Recall that Corn has been on a strong euphoric bull-run and sudden down days are not uncommon.

The market took a hit and may be wobbling tomorrow. Be safe.

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Demian’s Take on Fear and Dreams

Jun 19, 2007: 11:07 PM CST

Hermann Hesse is may be a strange source of wisdom for overcoming trading fears, but consider the following ideas.

These quotes are taken from Hess’s work Demian where the title character Max Demian is speaking to Sinclair (main character) regarding fear and “the larger picture of the human condition.”

“… You are only afraid if you are not in harmony with yourself. People are afraid because they have never owned up to themselves. [It’s] a whole society composed of men afraid of the unknown within them! … nothing good can come of this.”

A few passages later, Frau Eva Demian speaks of dreams overcoming fears:

“You must find your dream, and then the way becomes easy. But there is no dream that lasts forever; each dream is followed by another, and one should not cling to any particular one.”

Reading the book is not necessary to understand the meaning contained in these ideas, but it helps.

Demian suggests that we feel fear because we do not examine the ‘inner world’ of our own thoughts and desires, and thus fear the unknown. This fear causes us to err and not live up to the potential we have within us – many of us never realize this potential.

Dreams are so important in overcoming fear. By ‘dream,’ we do not mean the visions that occur at night, but rather large goals and the desires of our heart. Our desires in trading might be freedom from the corporate world, freedom to reap large profits, freedom from a daily commute, or it could be immense financial wealth and stability, or any number of expansive goals.

The suggestion is that these dreams must be as real and attainable as possible and we must pursue it with all the strength we have to achieve it. Demian speaks earlier in a passage regarding the strength of the human will to overcome obstacles – fear is a major obstacle in achieving our dreams. It keeps us locked in our current (retrograde) way of thinking and behavior and greatly limits our possibilities and achievements.

If you suffer from fear in trading, there are a variety of sources to seek help, but always keep your dreams and the reasons you love (or used to love) trading foremost in your mind and pursue them with renewed vigor with all your might.

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Link: The Risk Library Book Collection

Jun 19, 2007: 8:18 AM CST

Bill Luby at the VIX and More excellent blogsite posted two recent compilations regarding investment books you should consider reading.

The first list is entitled “Ten Anectodal/Historical Book Ideas for Investors” and includes one of my favorites: Alan Farley’s The Master Swing Trader.

A second list which is very important to active traders/investors is his Risk Library Collection which includes McKay’s lengthy, humorous title Extraordinary Popular Delusions and the Madness of Crowds. I also recommend Kenneth Grant’s Trading Risk.

I am jokingly disappointed he didn’t recommend one of my favorite books on the topic of risk, but it may not be a mainstream book: The Psychology of Risk: Mastering Market Uncertainty by Dr. Ari Kiev. Kiev takes you through lessons and case studies of traders he has worked with and it is a very understandable and enjoyable read.

Look over all his recommendations and read his brief commentary on each recommendation to see which book you want to begin reading first.

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