Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
SEC Filings Explained ~ Form13D
Schedule 13D is an SEC filing that must be submitted to the US Securities and Exchange Commission within 10 days, by anyone who acquires beneficial ownership of more than 5% of any class of publicly traded securities in a public company. A filer must promptly update its Schedule 13D filing to reflect any material change in the facts disclosed, including, among other things, the acquisition or disposition of 1% or more of the class of securities that are the subject of the filing.
Form Uses
13D filings allow the investing public to see who a public company's large shareholders are and, perhaps more importantly, why they have an interest in the company. These filings may be a precursor to hostile takeovers, company breakups, and other "change of control" events.
Reading the Form
Schedule 13D consists of seven different sections:
? Security and Issuer - This section contains basic information regarding the type and class the security and the contact information of the owner.
? Identity and Background - This section contains even more background into the owner, including if they were involved in any criminal activity in the past.
? Source and Amount of Funds or Other Considerations - This section lets investors know where the money is coming from. The most important use for this section is in determining if a buyout situation is overleveraged, when a majority of the purchase is leveraged or borrowed capital.
? Purpose of Transaction - This is the most important portion of the 13D filing. It allows you to see why they are buying shares in the company, whether it be for acquisition, hostile takeover, proxy war, or simply because they believe it is undervalued.
? Interest in Securities of the Issuer - This section states the express purpose of the transaction, which should be explained better in section 4 (Purpose of Transaction).
? Contracts, Arrangements, Understandings or Relationships with Respect to the Securities of the Issuer - This section contains any special relationships between the owner and the company. This is important to be sure that the buying is legitimate and not just a friend purchasing stock or the result of some other agreement.
? Materials to Be Filed as Exhibits - This is the second most important section. It contains any exhibits that may be filed along with the form. This is famously used for the filing of letters to management in the event of a hostile takeover. Exhibits can also elaborate on the Purpose of Transaction (Section 4).
SEC Filings Explained ~ POS AM Form
Post-effective amendments to provide updated prospectus information.
SEC Filings Explained ~ S-1
Form S-1 is an SEC filing used by public companies to register their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement by the Securities Act of 1933". The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering (IPO). Other less detailed registration forms, such as Form S-3 may be used for certain registrations.
Every business day from 10 to 5, S-1 forms are filed with the SEC's EDGAR filing system, the required filing format of the U.S. Securities and Exchange Commission. However many of these (typically 30% to 90%) are of the related Form S-1/A, which is used for filing amendments to a previously filed Form S-1.
The S-1 form has an OMB Approval Number of 3234-0065 and the online form is only 8 pages. However the simplicity of the form's design is belied by theOMB Office's figure of the Estimated Average Burden - 972.32 hours. This means that long time and effort has been used to collect and display information about the filer (a corporate registrant or new registrant who intends to offer securities). The S-1 form requires that the registrant provide information from diverse sources and incorporate this information using many rules or regulations, such as General Rules and Regulations under the Securities Act, Regulation C,Regulation S-K and Regulation S-X.
SEC Filings Explained ~ Form 5
Form 5 is an SEC filing submitted to the Securities and Exchange Commission on an annual basis by company officers, directors, or beneficial (10%) owners, which summarizes their insider trading activities. This form is simply a combination of year's Form 4 filings, which are mandatory filings made shortly after insiders make transactions.
SEC Filings Explained ~ Form 4
Form 4 is a United States SEC filing that relates to insider trading. Every director, officer or owner of more than ten percent of a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 must file with the United States Securities and Exchange Commission a statement of ownership regarding such security. The initial filing is on Form 3 and changes are reported on Form 4. The Annual Statement of beneficial ownership of securities is on Form 5. The forms contain information on the reporting person's relationship to the company and on purchases and sales of such equity securities.
Form 4 is stored in SEC's EDGAR database. EDGAR is Electronic Data Gathering, Analysis and Retrieval System. It is a registered trademark of the SEC.
A Form 4 must be filed before the end of the second business day following a change in ownership of securities or derivative securities (including the exercise or grant of stock options) for individuals subject to Section 16 of the Securities Exchange Act of 1934.
SEC Filings Explained ~ Form 3
Form 3 is an SEC filing filed with the US Securities and Exchange Commission to indicate a preliminary insider transaction by an officer, director, or beneficial (10%) owner of the company's securities. These are typically seen after a company IPOs when insiders make their first transactions. After a Form 3 is filed, future filings of the same nature are filed under Form 4 (standard disclosure) or Form 5 (annual disclosure).
SEC Filings Explained ~ F-1
Registration statement for certain foreign private issuers.
/// SEC Filings Explained ~ Form D
Form D is an SEC Filing form to be used to file a notice of an exempt offering of securities under Regulation D. Commission rules require the notice to be filed by companies and funds that have sold securities without registration under the Securities Act of 1933 in an offering based on a claim of exemption under Rule 504, 505 or 506 of Regulation D or Section 4(6) of that statute. Commission rules further require the notice to be filed within 15 days after the first sale of securities in the offering. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest. If the due date falls on a Saturday, Sunday or holiday, it is moved to the next business day.
Privately held companies that raise capital are required to file a Form D with the SEC to declare exempt offering of securities. Many of these filings show investments in small, growing companies through venture capital and angel investors, as well as certain pooled investment funds.
Using stockcharts.com for ZigZag and ZigZag (Retrace.)
The ZigZag and ZigZag (Retrace) can be found in SharpCharts as a price overlay in the Chart Attributes section or as an addition to an indicator. Upon selecting the Zigzag feature from the drop down box, the parameters window will appear empty. Five (5%) is the default parameter, but this can change depending on a security's price characteristics. Some securities produce too few Zigzag lines at 5% so the default is set lower (e.g. 3.75%). Some securities produce too many zigzag lines at 5% so the default is set higher (e.g. 6.25%). The Zigzag parameter can be seen in the upper left corner of the chart. Once the Zigzag feature is applied, chartists can adjust the parameter to suit their charting needs. A lower number will make the feature more sensitive, while a higher number will make it less sensitive. Click here for a live chart with the Zigzag (Retrace.) feature.
The ZigZag and ZigZag (Retrace.) filter price action and do not have any predictive power. The ZigZag lines simply react when prices move a certain percentage. Chartists can apply an array of technical analysis tools to the ZigZag. Chartists can perform basic trend analysis by comparing reaction highs and lows. Chartists can also overlay the ZigZag feature to look for price patterns that might not be as visible on a normal bar or line chart. The ZigZag has a way of highlighting the important movements and ignoring the noise. When using the ZigZag feature, don't forget to measure the last line to determine if it is temporary or permanent. The last ZigZag line is temporary if the current price change is less than the ZigZag parameter. The last line is permanent when the price change is greater than or equal to the ZigZag parameter.
ZigZag Retracements and Projections
Sharpcharts users can choose between the normal "ZigZag" and "ZigZag (Retrace.)." As shown in the examples above, the normal ZigZag shows lines that move at least a specific percentage. The ZigZag (Retrace.) connects the reaction highs and lows with labels that measure the prior move. The numbers on the dotted lines reflect the difference between the current Zigzag line and the ZigZag line immediately before it. For example, the chart below shows Altera (ALTR) with the 15% ZigZag (Retrace.) feature. Three ZigZag lines have been labeled (1, 2 and 3). The dotted line connecting the low of Line 1 with the low of Line 2 shows a box with 0.638. This means Line 2 is .638 (63.8%) of Line 1. A number below 1 means the line is shorter than the prior line. The dotted line connecting the high of Line 2 with the high of Line 3 shows a box with 1.646. This means Line 3 is 1.646 (164.6%) of Line 2. A number above 1 means the line is longer than the prior line.
ZigZag & Elliott Wave
The ZigZag feature can be used to filter out small moves and make Elliott Wave counts more straight-forward. The chart below shows the S&P 500 ETF with a 6% ZigZag to filter moves less than 6%. After a little trial and error, 6% was deemed the threshold of importance. An advance or decline greater than 6% was deemed significant enough to warrant a wave for an Elliott count. Keep in mind that this is just an example. The threshold and the wave count are subjective and dependent on individual preferences. Based on the 6% ZigZag, a complete cycle was identified from March 2009 until July 2010. A complete cycle consists of 8 waves, 5 up and 3 down.
ZigZag Calculation
The ZigZag is based on the chart "type." Line and dot charts, which are based on the close, will show the ZigZag based on closing prices. High-Low-Close bars (HLC), Open-High-Low-Close (OHLC) bars and candlesticks, which show the period's high-low range, will show the ZigZag based on this high-low range. A ZigZag based on the high-low range is more likely to change course than a ZigZag based on the close because the high-low range will be much larger and produce bigger swings.
The parameters box allows chartists to set the sensitivity of the ZigZag feature. A ZigZag with 5 in the parameter box will filter out all movements less than 5%. A ZigZag(10) will filter out movements less than 10%. If a stock traded from a reaction low of 100 to a high of 109 (+9%), there would not be a line because the move was less than 10%. If the stock advanced from a low of 100 to a high of 110 (+10%), there would be a line from 100 to 110. If the stock continued on to 112, this line would extend to 112 (100 to 112). The ZigZag would not reverse until the stock declined 10% or more from its high. From a high of 112, a stock would have to decline 11.2 points (or to a low of 100.8) to warrant another line. The chart below shows a QQQQ line chart with a 7% ZigZag. The early June bounce was ignored because it was less than 7% (black arrow). The two pullbacks in July were ignored because they were much less than 7% (red arrows).
Be careful with the last ZigZag line. Astute chartists will notice that the last ZigZag line is up even though QQQQ advanced just 4.13% (43.36 to 45.15). This is just a temporary line because QQQQ has yet to reach the 7% change threshold. A move to 46.40 is needed for a gain of 7%, which would then warrant a permanent ZigZag line. Should QQQQ fail to reach the 7% threshold on this bounce and then decline below 43, this temporary line would disappear and the prior ZigZag line would continue from the early August high.
ZigZag
Introduction
The ZigZag feature on SharpCharts is not an indicator per se, but rather a means to filter out smaller price movements. A ZigZag set at 10% would ignore all price movements less than 10%. Only price movements greater than 10% would be shown. Filtering out smaller movements gives chartists the ability to see the forest instead of just trees. It is important to remember that the ZigZag feature has no predictive power because it draws lines base on hindsight. Any predictive power will come from applications such as Elliott Wave, price pattern analysis or indicators. Chartists can also use the ZigZag with retracements feature to identify Fibonacci retracements and projections.
Volume Weighted Average Price (VWAP) serves as a reference point for prices for one day. As such, it is best suited for intraday analysis. Chartists can compare current prices with the VWAP values to determine the intraday trend. VWAP can also be used to determine relative value. Prices below VWAP values are relatively low for that day or specific time. Prices above VWAP values are relatively high for that day or specific time. Keep in mind that VWAP is a cumulative indicator, which means the number of data points progressively increases throughout the day. On a 1-minute chart, IBM will have 90 data points (minutes) by 11AM, 210 data points by 1PM and 390 data points by the close. The number dramatically increases as the day extends. This is why VWAP lags price and this lag increases as the day extends.
Uses for Volume Weighted Average Price (VWAP)
VWAP is used to identify liquidity points. As a volume-weighted price measure, VWAP reflects price levels weighted by volume. This can help institutions with large orders. The idea is not to disrupt the market when entering large buy or sell orders. VWAP helps these institutions determine the liquid and illiquid price points for a specific security over a very short time period.
VWAP can also be used to measure trading efficiency. After buying or selling a security, institutions or individuals can compare their price to VWAP values. A buy order executed below the VWAP value would be considered a good fill because the security was bought at a below average price. Conversely, a sell order executed above the VWAP would be deemed a good fill because it was sold at an above average price.
Characteristics Of Volume Weighted Average Price (VWAP)
Like moving averages, VWAP lags price because it is an average based on past data. The more data there is, the greater the lag. A stock has been trading for some 331 minutes by 3PM. As a cumulative "average", this indicator is akin to a 330 period moving average. That is a lot of past data. The 1-minute VWAP value at the end of the day is often quite close to the ending value for a 390 minute moving average. Both moving averages are based on the 1 minute bars for that day. At the close, both are based on 390 minutes of data (one full day). One cannot compare the 390 minute moving average to VWAP during the day though. A 390 minute moving average at 12:00PM will include data from the previous day. VWAP will not. Remember, VWAP calculations start fresh at the open and end at the close. 150 minutes of trading have elapsed by 12:00PM. Therefore, VWAP at 12:00 would need to be compared with a 150 minute moving average.
Despite this lag, chartists can compare VWAP with the current price to determine the general direction of intraday prices. It works similar to a moving average. In general, intraday prices are falling when below VWAP and intraday prices are rising when above VWAP. VWAP will fall somewhere between the day's high-low range when prices are range bound for the day. The next three charts show examples of rising, falling and flat VWAP.
Calculation of Volume Weighted Average Price (VWAP)
There are five steps involved in the VWAP calculation. First, compute the typical price for the intraday period. This is the average of the high, low and close {(H+L+C)/3)}. Second, multiply the typical price by the period's volume. Third, create a running total of these values. This is also known as a cumulative total. Fourth, create a running total of volume (cumulative volume). Fifth, divide the running total of price-volume by the running total of volume.
Cumulative(Volume x Typical Price)/Cumulative(Volume)
The example above shows 1-minute VWAP for the first 30 minutes of trading in IBM. Dividing cumulative price-volume by cumulative volume produces a price level that is adjusted (weighted) by volume. The first VWAP value is always the typical price because volume is equal in the numerator and the denominator. They cancel each other out in the first calculation. The chart below shows 1-minute bars with VWAP for IBM. Prices ranged from 127.36 on the high to 126.67 on the low for the first 30 minutes of trading. It was actually a pretty volatile first 30 minutes. VWAP ranged from 127.21 to 127.09 and spent its time in the middle of this range.
Tick versus Minute on Volume Weighted Average Price (VWAP)
Traditional VWAP is based on tick data. As one can imagine, there are many ticks (trades) during each minute of the day. Active securities during active time periods can have 20-30 ticks in one minute alone. With 390 minutes in a typical stock exchange trading day, many stocks end up with well over 5000 ticks per day. There are over 5000 stocks traded every day and these ticks start adding up exponentially. Needless to say, tick-data is very resource intensive.
Volume Weighted Average Price (VWAP)
Introduction
Volume-Weighted Average Price (VWAP) is exactly what it sounds like: the average price weighted by volume. VWAP equals the dollar value of all trading periods divided by the total trading volume for the current day. Calculation starts when trading opens and ends when trading closes. Because it is good for the current trading day only, intraday periods and data are used in the calculation.
Volume by Price is best suited for identifying present or future support and resistance. Don't go too far in the future though. One to four weeks is usually enough. The indicator marks potential support when prices are above and potential resistance when prices are below. These support or resistance levels can be enhanced by looking at the positive (green) and negative (red) volume within the Volume by Pricebars. Long green portions reflect more demand that can enhance support. Long red portions reflect more supply that can augment resistance. It is important to confirm Volume by Price findings with other indicators and analysis techniques. Momentum oscillators and chart patterns are good complements to this volume based indicator.
Volume by Price Resistance Breaks
A break above a long Volume by Price bar signals an increase in demand that can foreshadow higher prices. Long Volume by Price bars that are above prices mark supply overhangs that demand has not been able to overcome. A break above this resistance zone signals strengthening demand and higher prices are expected.
The McDonalds (MCD) chart below shows a long Volume by Price bar around 69-69.5. Also notice that the stock met resistance in the 69-70 area from late April until June. A large Symmetrical Triangle could be forming on the price chart as MCD bounces above its prior low. A break above these resistance zones would show strength in demand and project higher prices. The second chart shows MCD breaking resistance in July and surging to new highs in August.
Volume by Price Support Breaks
A break below a long Volume by Price signals a victory for supply that can foreshadow lower prices. Long Volume by Price bars that are below prices show elevated interest areas and potential support. A break below this support zone signals a significant increase in selling pressure and lower prices are then expected.
The Sandisk (SNDK) chart shows a long Volume by Price bar marking support around 42-44 in mid August. Also notice that the stock forged at least three reaction lows around 42 from early July to mid August. This support (demand) zone is clearly marked. The second chart shows SNDK breaking below the previously identified Volume by Price support zone with high volume. Demand crumbled, supply won the day and prices moved sharply lower.
Identifying Resistance using Volume by Price
The chart for Tyco Electronics (TEL) shows Volume by Price identifying resistance around 29 in mid June. Remember, the April break above this bar is not really a breakout because the current Volume by Price calculation extends from mid January to mid June. The longest bar marks current resistance in the 29 area. TEL is at its make-or-break point with prices near resistance. The second chart shows Volume by Price resistance from the first and the ultimate failure at resistance.
Identifying Support using Volume by Price
The chart for Netflix (NFLX) shows Volume by Price identifying support around 95-100 at the end of June. Notice that this is the longest bar. Also notice that NFLX is beginning a pullback so we can useVolume by Price to estimate support in the near future. The second chart shows NFLX with the yellow area marking Volume by Price support from the first chart. Support was expected in the 95-100 area and the stock reversed here in late July. Notice that volume surged in August to validate the reversal off support.
Volume by Price changes
Before looking at some examples, it is important to understand how Volume by Price works. Volume by Price can be used to identify current or future support or resistance. Current Volume by Price bars should not be used to validate past support or resistance levels because the indicator is based on all the price-volume data shown on the chart. This means six months of data for a chart that extends from January to June. It may appear as Volume by Price identified support in March, but keep in mind that the indicator data extends well beyond March, which is essentially the future. To effectively identify support or resistance in March, the chart needs to end at or before March, not after March.
The chart below shows Becton Dickinson (BDX) with Volume by Price over a six month period ending September. Looking at the chart, it appears that Volume by Price correctly identified resistance around 71-72 in June (red arrows). Notice that the longest bar covers this price area. There is one problem. This bar includes data from July to September, which would not have been available in June and is therefore not applicable.
To accurately use Volume by Price for a June forecast, we need a chart that ends in May. The second chart shows BDX from December to May, six months. A different picture of Volume by Price emerges now. The longest bars are in the upper 70s, not in the low 70s. Analysis should focus on the present or future when using Volume by Price bars.
The BDX chart above also highlights another nuance of Volume by Price. Big price gaps can produce Volume by Price bars that equal zero. This makes sense because Volume by Price equals zero when there are no closing prices within a specific price block. On the BDX chart below, the Volume by Price bar around 72 equals zero because of a closing gap from 73 to 71 in the third week of May. Keep in mind that Volume by Price is based on closing prices, not intraday prices. The open, high and low play no role in its calculation.
Volume by Price Interpretation
Volume by Price can be used to identify current support and resistance levels or estimate future support and resistance levels. Heavy volume at certain price blocks shows elevated interest levels. Keep in mind that there is a buyer for every seller. Therefore, it is sometimes difficult to determine the true bias behind volume. Regardless of the bias, price blocks with heavy volume mark levels with elevated interest that influence future supply or demand (a.k.a. resistance or support).
Long Volume by Price bars reveal areas of elevated interest. Long Volume by Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume by Price bars above prices should be watched as potential resistance on a bounce.
Price breaks above or below Volume by Price levels can also be used as signals. A break above Volume by Price resistance shows strength because demand was strong enough to overcome a supply overhang. Similarly, a break below a long Volume by Price bar shows weakness because supply was ample enough to overwhelm demand.
Volume by Price Calculation
Volume by Price calculations are based on the entire period displayed on the chart. A five month daily chart would be based on ALL five months of daily price data. A two week 30-minute chart would be based on two weeks of 30-minute price data. A three year weekly chart would be based on three years of weekly data. Volume by Price calculations do not extend beyond the historical data shown on the chart.
There are four steps involved in the calculation.
All calculations are based on closing prices.
1. Find the closing high-low range for the entire period.
2. Divide this range by 12 to create 12 equal price blocks.
3. Total the amount of volume traded within each price block.
4. Divide the volume into up volume and down volume.
Volume is negative when the closing price moves down from one period to the next. Volume is positive when the closing price moves up from one period to the next.
The example above shows a Volume by Price calculation taken from the Nasdaq 100 ETF (QQQQ) from April 12th until September 15th 2010. Closing prices ranged from 42.47 to 50.42 during this period (50.42 - 42.47 = 7.95). Prices were sorted from low to high and then divided into 12 even blocks (7.95/12 = .6625). This example shows the first three price blocks (42.47 to 43.13, 43.14 to 43.80 and 43.81 to 44.46). Starting from the low (42.47), we can add the block size (.6625) to create the price blocks leading to the high. Only prices that fall within these blocks are shown. Add the volume for each close that falls with each price block to find the Volume by Price bars. Volume can then be separated into positive and negative volume.
The chart above plots Volume by Price for QQQQ during the entire period. The lowest three price blocks correspond to the spreadsheet example. Notice that the Volume by Price bars are divided into red and green to separate positive volume from negative volume. The longest Volume by Price bar extends from the fifth price block from the bottom (45.12 to 45.78). Despite the heaviest volume, positive and negative volume are pretty evenly split.
Suggested Scans for Price Channels
Oversold Bounce in Larger Uptrend: This scan starts with stocks that average $20 per share and 100,000 daily volume per day. An uptrend is present because the stock is trading above its 200-day SMA. The stock becomes oversold with a move below the Lower Price Channel and then turns up with a cross back above the Lower Price Channel.
Overbought Decline in Larger Downtrend: This scan starts with stocks that average $20 per share and 100,000 daily volume per day. A downtrend is present because the stock is trading below its 200-day SMA. The stock becomes overbought with a move above the Upper Price Channel and then turns down with a cross back below the Upper Price Channel
Volume by Price
Introduction
Volume by Price is an indicator that shows the amount of volume for a particular price range. Volume by Price bars are shown horizontal on the left side of the chart to match up with price points. These color-coded bars divide volume based on up periods (green) and volume on down periods (red). Chartists can use Volume by Price to identify high volume price points that may provide support or resistance.
Conclusions on Price Channels
Price Channels tells us when a security reaches an xx-period high or an xx-period low. 20-day Price Channels mark the 20-day high-low range, 10-week Price Channels mark the 10-week high-low range. The centerline marks the mid point. Securities that continuously exceed the upper channel line show strength. After all, it takes strong buying pressure to forge higher highs. Conversely, securities that continuously break the lower channel line show weakness. Strong selling pressure is evident with lower lows. Using Price Channels, chartists can determine the dominant force, buying pressure or selling pressure. As with all indicators, it is important to use other analysis techniques to confirm or refute the Price Channels. Chartists can use chart patterns, indicators or basic chart analysis to complement Price Channels.
Using Price Channels to see Overbought/Oversold Conditions
Measuring overbought and oversold conditions can be tricky with Price Channels. Securities can become overbought and remain overbought in a strong uptrend. Similarly, securities can become oversold and remain oversold in a strong downtrend. In a strong uptrend, prices can move above the upper channel line and continue above the upper channel line. In fact, the upper channel trend line will rise as price continues above the upper channel. This may seem technically overbought, but it is a sign of strength to remain overbought. Similarly, the Stochastic Oscillator can move above 80, which is technically overbought, and remain overbought for an extended period.
Successful use of overbought and oversold levels depends on successful trend identification. Once a bigger uptrend has been identified, traders can look for oversold levels in the smaller trend. Short-term oversold levels occur after a pullback within a bigger uptrend. As noted above, the weekly charts turned bullish when QQQQ surged above the upper channel line. Once the weekly chart is bullish, traders can turn to the daily chart to look for oversold signals. The weekly chart represents the bigger trend. The daily chart represents the smaller trend.
The chart above shows daily prices for QQQQ. The bigger trend (weekly chart) is up so we would be looking for pullbacks on the daily chart. The green arrows show when QQQQ dipped below the 20-day Price Channel. There were two good signals in early July and early November. There were three touches in January-February. The first two signals were "early", while the February signal was a direct hit.
Inverse logic can be applied in downtrends. A weekly downtrend starts with a plunge below the lower channel line. Once this downtrend is established, chartists can turn to the daily chart to look for overbought signals. Overbought signals occur after a bounce within a bigger downtrend. Downtrends tend to be faster than uptrends. This means overbought readings may not occur during a strong or fast downtrend. Chartists may then need to tweak the Price Channel settings or use the centerline for signals. Prices are more likely to touch the centerline than the upper channel line.
Are Price Channels Similar to Stochastics?
Price Channels are similar to the Stochastic Oscillator when one considers what the Stochastic Oscillator measures. This momentum oscillator measures the level of the close relative to the high-low range over a given period of time, say 20 days. The Stochastic Oscillator is relatively high when the close is near the high end of its 20-day range and low when the Stochastic Oscillator is near the low end of this range. Put in numbers, the Stochastic Oscillator is relatively high above 80 and relatively low below 20.
Let's compare the 20-day Fast Stochastic Oscillator with 20-day Price Channels. The Stochastic Oscillator will usually be above 80 when prices exceed the upper Price Channel. Similarly, the 20-day Fast Stochastic Oscillator will usually be below 20 when prices move below the lower Price Channel. There is a slight timing difference because Price Channel data ends with the prior period. Stochastic Oscillator data, on the other hand, ends with the current period. This means the Stochastic Oscillator includes the most recent price action, but Price Channels do not. Nevertheless, the two measure pretty much the same thing.
The Dow Industrials SPDR (DIA) chart shows 20-day Price Channels (pink) with the 20-day Fast Stochastic Oscillator. Prices are near the upper channel line when the Stochastic Oscillator is overbought (red lines). Prices are near the lower channel line when the Stochastic Oscillator is oversold (green lines). Prices are usually below the centerline of the Price Channel when the Stochastic Oscillator is below 50, which is its centerline (early June). Prices are usually above the centerline when the Stochastic Oscillator is above 50.
Price Channels Trend Identification
Price Channels can be used to identify strong moves that may result in lasting trend reversals. Basically, a move above the 20-day Price Channel signals a new 20-day high. A move above the 20-week Price Channel signals a new 20-week high. Obviously, a 20-week high is more consequential than a 20-day high. The choice of timeframe depends on your trading timeframe and rational for using Price Channels. For example, chartists can use weekly charts with 20-week Price Channels to determine the big trend and overall trading bias.
The chart above shows weekly prices for the Nasdaq 100 ETF (QQQQ) over a 4 1/2 year period. The green arrows mark weekly highs above the upper channel line that signaled the start of an uptrend. The red arrows mark weekly lows below the lower channel that signaled the start of a downtrend. These channel breaks caught a few good trends, but there were two whipsaws or bad signals. Indicator signals are not perfect and there will be whipsaws. It is just part of the game
Signals can be filtered further by using a close-only line plot. The second chart shows the same 4 1/2 year period with 20-week Price Channels and QQQQ as a close-only line plot. This eliminates the intra-week highs and lows. Notice that QQQQ did not close above the upper channel line in May 2008 or below the lower channel line in May 2010 (blue arrows). Using a close-only price chart reduces volatility and signals.
Interpretation of Price Channels
Price Channels can be used to identify trend reversals or overbought/oversold levels that denote pullbacks within a bigger trend. A surge above the upper channel line shows extraordinary strength that can signal the start of an uptrend. Conversely, a plunge below the lower channel line shows serious weakness that can signal the start of a downtrend. Once an uptrend has started, chartists can move to a shorter timeframe to identify pullbacks with oversold readings. A move below the lower channel line indicates oversold conditions that can foreshadow an end to the pullback. Similarly, short-term bounces within a bigger uptrend can be identified with Price Channels. A move above the upper channel line signals overbought conditions that can foreshadow an end to the bounce.
Interpretation of Price Channels
Price Channels can be used to identify trend reversals or overbought/oversold levels that denote pullbacks within a bigger trend. A surge above the upper channel line shows extraordinary strength that can signal the start of an uptrend. Conversely, a plunge below the lower channel line shows serious weakness that can signal the start of a downtrend. Once an uptrend has started, chartists can move to a shorter timeframe to identify pullbacks with oversold readings. A move below the lower channel line indicates oversold conditions that can foreshadow an end to the pullback. Similarly, short-term bounces within a bigger uptrend can be identified with Price Channels. A move above the upper channel line signals overbought conditions that can foreshadow an end to the bounce.
Upper Channel Line: 20-day high
Lower Channel Line: 20-day low
Centerline: (20-day high + 20-day low)/2
The formula above is based on a daily chart and a 20-period Price Channel. Price Channels can be used on intraday, daily, weekly or monthly charts. The look-back period (20) can be shorter or longer. Shorter look-back periods, such as 10 days, produce tighter channel lines. Longer look-back periods produce wider channels.
The Price Channel formula does not include the most recent period. Price Channels are based on prices prior to the current period. A 20-day Price Channel for October 21 would be based on the 20-day high and 20-day low ending the day before, October 20. A channel break would not be possible if the most recent period was used. On the chart below, notice how prices broke above the upper price channel because the high was based on the next-to-the-last bar, not the current bar.
Price Channels
Introduction
Price Channels are lines set above and below the price of a security. The upper channel is set at the x-period high and the lower channel is set at the x-period low. For a 20-day Price Channel, the upper channel would equal the 20-day high and the lower channel would equal the 20-day low. The dotted centerline is the midpoint between the two channel lines. Price Channels can be used to identify upward thrusts that signal the start of an uptrend or downward plunges that signal the start of a downtrend. Price Channels can also be used to identify overbought or oversold levels within a bigger downtrend or uptrend.
Price Channels
Introduction
Price Channels are lines set above and below the price of a security. The upper channel is set at the x-period high and the lower channel is set at the x-period low. For a 20-day Price Channel, the upper channel would equal the 20-day high and the lower channel would equal the 20-day low. The dotted centerline is the midpoint between the two channel lines. Price Channels can be used to identify upward thrusts that signal the start of an uptrend or downward plunges that signal the start of a downtrend. Price Channels can also be used to identify overbought or oversold levels within a bigger downtrend or uptrend.
Pivot Points ~ Conclusion
Pivot Points offer chartists a methodology to determine price direction and then set support and resistance levels. It usually starts with a cross of the Pivot Point. Sometimes the market starts above or below the Pivot Point. Support and resistance come into play after the crossover. While originally designed for floor traders, the concepts behind Pivot Points can be applied across various timeframes. As with all indicators, it is important to confirm Pivot Point signals with other aspects of technical analysis. A bearish candlestick reversal pattern could confirm a reversal at second resistance. Oversold RSI could confirm oversold conditions at second support. An upturn in MACD could be used to confirm a successful support test. On a final note, sometimes the second or third support/resistance levels are not seen on the chart. This is simply because their levels exceed the price scale on the right. In other words, they are off the chart.
Pivot Points ~ Support and Resistance
Support and resistance levels based on Pivot Points can be used just like traditional support and resistance levels. The key is to watch price action closely when these levels come into play. Should prices decline to support and then firm, traders can look for a successful test and bounce off support. It often helps to look for a bullish chart pattern or indicator signal to confirm an upturn from support. Similarly, should prices advance to resistance and stall, traders can look for a failure at resistance and decline. Again, chartists should look for a bearish chart pattern or indicator signal to confirm a downturn from resistance.
The second support and resistance levels can also be used to identify potentially overbought and oversold situations. A move above the second resistance level would show strength, but it would also indicate an overbought situation that could give way to a pullback. Similarly, a move below the second support would show weakness, but would also suggest a short-term oversold condition that could give way to a bounce.