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98 views21 pagesSMI Judging The Market
Uploaded by
George WooCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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sus
Stack Market Institute
ere
the Table of Content
Fundamental Concepts and Basic Tools =... ...... 1
What are the SMI Indexes 2... ee eee 24
aTRAWCROIWAUS St Ceieence Ss Pas ee 2
The Optimism-Pessimism Index... 2... 1. 3
sTheiTiele Baronieter cy ssc. = Ss. 3
Individual Group Indexes». 2... ee 4
Using the SMI indexes for Market Analysis... ... . 4-14
Determining and Analyzing Trends... 4
Relating the Wyckoff Wave and theOP. 2. 2... 7
Analyzing the Level of Market Volume... 2... 8
Analyzing the Trend Barometer»... . 1... . 8B
Analyzing the Intraday Data... 10
Analyzing the Market with Figure Charts... 2... 12
Analyzing the Market with Group Indexes»... . . 13
Using the Daily Stock Report... 2 2. ee es ot)
pipeonvifedIng sens foes. cate: Meee 14-16
FinalThOugHe! Preis. 1.75 eres oes 16-17
Consultation Forms. 4
1
Judging the Market
‘A “how to” manual on determining the present position and probable future
trend of the market based on it's own action as charted by the SMI Indexes,
1
Fundamental Concepts and Basic Tools
To the inexperienced or untrained trader much of the market's action
probably seems like a disorganized jumble of activity. Its important to begin
this study with an understanding that this Is not really the case. All market
fluctuations and movements in the individual stocks are reflections of the law
of supply and demand at work. This truth states that when the level of demand
exceeds the level of supply, individual stock prices rise and the general market
‘advances. When it is the supply that is in excess, the prices of stocks fall and
the general market declines. On any given day, the victory of the forces of
demand over supply or supply over demand can be seen in the closing Dow
Jones Industrials average.
‘Trying to use the Dow Jones average even it in conjunction with the day's
‘otal volume to judge the markets present position and probable future course
is like trying to breath at the top of avery high mountain. Itis possible, but very
4itficult. The problem is that this figure does not reflect anything about how
the market acted. Indeed, in many instances, itis not even a true barometer of
‘what happened. In addition, it says nothing abouthowa particular day fits into.
the longer term picture nor does it provide any clear indication of what is in
store for the future.
Judging the market in terms of the law of supply and demand, or from its
‘own action, is called technical analysis. To achieve success in this type of
study requires tools that facilitate a detailed and reliable examination of the
two conflicting forces at work in the market place. The SMI Indexes as
presented at the close of each trading session in The Pulse of the Markat
Provide a kit of tools to help the serious investor with his or her studies.
Every market move or individual trading session is comprised of a series of
smaller moves and results {rom the development of important price and
volume relationships. Sound technical analysis requires a detailed picture of
all important aspects of every market session. No single part of the media fills
this need. The SMI Indexes, however, do provide a comprehensive package ot
the raw materials needed to make sound judgements on what the market has
been doing and is likely to do in the future. SMI's experience provides the
training to effectively analyze the data,
ae What 3
‘The market's action can be measured in terms of price movement or volume.
No single index, average, or indicator can fully reveal the meaning of both
types of action nor the important relationships that exist between the two.
Therefore. the SMI Indexes have been developed into a series of tools, which
do cover all that is important, Price movements are reflected in the Wyckoft
Wave and individual group indexes. Volume action is monitored by way of the
Optimism-Pessimism Index. The important relationships between price
volume are contained in the Technometer, Force and Momentum. Taken as a
‘group, they can lead to better understanding of the market.
The Wyckott Wave
In order to determine the current trend, the present position, and probable
future trend of the market itis necessary to have a means of charting the
market's action, that will reveal the general trend. The general trend of the
market is created by the interaction of the forces of supply and demand. These
are reflected in the selling and buying pressures that cause stock prices to
fluctuate. The total price movements the general trend. The ideal approach to
‘observing and measuring this movement's with a common stock price index,
which is what the Wyckotf Wave is
The SMI Wyckoff Wave is not simply an average of stock prices. It is an
index, which serves as a miniature version of the markt, faithfully bringing to
light its movements. The Wave is comprised of the weighted movement of
eight individual stocks. Currently, these eight issues and their individual
multipliers are as follows:
Exxon (XON) 8 Merril Lynch (MER) 5
General Electric (GE) 8 UAL, Inc. (UAL) 6
General Motors (GM) 4 Union Carbide (UK) 6
BM. (IBM) 8 US. Steel (xX) 8
‘These stocks are all market leaders. By that itis meant that they are all widely
held and actively traded, and tend to participate in most important market
‘Most of the generally accepted market indexes are computed based on
invalid assumptions. These indexes generally assume that all the high prices
‘of their components and all the low prices happen atthe same time,and reflect
this assumption in the quotation of their daily highs and lows. A similar
‘assumption is made in computing the closing price for each day. In this case,
however, the assumption is valid, since the end of trading for all stocks is fixed
by the closing of the market. The end result of these suspect methods of
calculation can be, and often is, a lack of sensitivity. This is a particularly
important liability at turning points in the market, which are the best times for
initiating and closing out positions.
‘The calculation of the Wyckoff Wave is much more representative of the
market's actual action. This is because the Waveis not just calculated, but also
monitored. During every market session, every price change in each of the
‘eight component stocks is recorded and charted as it occurs. This provides a q
!
‘minute by minute picture of what the market is doing. Throughout each day,
the important intraday moves that develop are summarized using the prices in
effect at that time. Then, at the end of the day, the high and low are picked from
the intraday moves. The day's close is based on the prices at the close of
trading at the New York Stock Exchange.
‘The Optimism-Pessimism Index (0.P.)
‘The Wyckoff Wave is based on price action. As such, it reflects what the
market is doing. Of equal importance, is how the market is doing what it is
doing. These indications come trom the characteristics of the volume, which
are reflected in the O.P.-Index. This index is extremely important because
knowing the what without knowing the how can lead to costly mistakes.
To understand how the O.P. is computed, itis necessary tofirst know whatit,
is. This index is a numerical representation of net up volume minus net down
volume where one point equals one million shares.
‘This concept can be utilized in one of two ways. One is the SMI way and the:
other is the conventional approach. The conventional wisdom would be to wait
Until the final up and down volume figures are in for a particular day, and then
{0 subtract the one from the other. In a very general sort of way, this would
work and could be used. Unfortunately, this method is not very sensitive, It
does not reflect the relative importance of the various intraday moves, which
are after all where the more important moves get their starts.
‘At SMI, we allocate the volume based on the intraday price action. The
volume that is traded while the Wyckoff Wave is advancing is considered up
volume. Conversely, the volume that is traded while the Wyckoff Wave
declining is considered down volume. By adding all of the up volumes and all
of the down volumes separately and then subtracting the downside total from
the upside total, the result gives an indication of whether the day had net
Upside or downside volume and how much. This method also permits the
making of assessments on the relative strengths and weaknesses of each
intraday move.
‘The Trend Barometer
The Trend Barometer is not a single index, but rather a set of three. Th
ames are Technometer, Force, and Momentum. Used singly and in
‘combination, these indicators monitor three important market factors.
‘One is the degree to which a particular market move has become
‘overbought or oversold, This information comes from the Technometer. Just
because prices have been moving a particular direction, there is no guarantee
that they will continue to move in that direction. In fact, the more overbought
(oF oversold the situation becomes the greater is the likelihood that the market
will reverse itselt. Another important indication, which is provided by the Force
Index Is the amount of pressure being exerted in a given direction. If the
‘market is trying to move one way but the pressure being applied isin the other
irection, the result is likely to be little prograss. On the other hand, if the
pressure on the market isin step with the direction of the price movement, the
likelinood of a more substantial move is increased. Finally, Momentum
provides a measure of the speculative interest in a particular move. The
Speculative interest like a catalyst. Ithelps toget the action going and keep it
going once started. if @ move lacks a good measure of this important ingredient, it probably will not go very far. Itt is well endowed, though, the
move will probably go a long way. Togetner, these three indications are
extremely valuable in the timing of trades.
Individual Group Indexes
‘The market is not a single entity. It is a diverse mixture of numerous
individual issues, Stocks that are in a particular industry group tend to move
together. Therefore, by monitoring indexes composed of representative
samples from the various groups, it is possible to isolate where the best
‘opportunities are likely tobe found ata given time. Ifthe general market seems
vulnerable to upside action, then potential trade candidates should be sought
‘among those groups that appear stronger than the market. When the market
Seems vulnerable to downside action, the best opportunities are likely to be
found in groups that appear to be relatively weaker.
mi.
Using the SMI indexes for Market Analysis,
‘The SMI Indexes are presented daily in The Pulse of the Market. This four
‘page report includes all the data needed to make intelligent market decisions.
frig designed to lead the subscriber through an orderiy investigation of the
day's activity. This begins with a longer term overview of the general market,
which then focuses down on the shorter term picture. From here, the emphasis
js switched to individual sectors of the market, and then finally to the individual
‘Stocks, The result is that in a relatively short period of time, the trader can
arrive at concrete conclusions regarding the market's present position, i's
probable future trend, and any acfions that seem warranted at the time
Determining and Analyzing Trends
“The first page of The Pulse of the Market provides a graphic representation
‘of the market's action for approximately the last six [Link] reflected by the
five SMI Indexes and the total volume. The first step in analyzing this picture
‘should be to determine the trend of the market. To do this, it must frst be
Understood what a trend is, Stated as simply as possible, the trend is the path
of least resistance. It may be up, down, or horizontal
'An uptrend is defined by two successive reaction lows, such as the onesin
column one and column three on the sample. By connecting these two points,
@ suppor line is constructed. inbetween these two points, there is a rally
(Column 2). By constructing a line paraliel to the support line and passing
through the highest point of the rally, an overbought line is formed. The
upward sloping channel that results between the two lines is an uptrend.
°a down trend is the opposite of an uptrend. Itis formed by the construction
of a supply line and an oversold line. A supply line is based on two successive
rally tops as in columns 16 and 20. The oversold line is formed parallel to the
supply fine passing through the lowest point ofthe reaction between the (wo
falies, (The day separating columns 18 and 19). These two lines result in a
‘downward sloping channel, which is the down trend.
“Tne third possible trend is the hortizontal trend. Another name for this sa
trading range. The basis for defining a trading range is @ support level and &
fosistance level. The support level serves as a floor for the trading range. Itis Constructed by drawing a horizontal line through the low pointof a reaction as
in column 22. After the market completes a reaction, it generally rallies, The
top of that rally provides the point for defining the resistance level, which acts
48.8 ceiling for the trading range. This line is also horizontal and is parallels
the support level ple, the market had been moving
lower at the time the trading range was formed. Consequently, the support
{evel was putin place fist. tis equally possible for the markettotform atrading
range after a period of sustained upward action. In this case, the resistance
levelis established first. An example of this canbe seen incolumns'ifteen and
sixteen,
In addition to varying in direction, trends also cover different time frames.
Some may be of ashort to intermediate nature while others are of alonger term
nature. There are no firm rules to establish where a short term trend becomes
intermediate, or where an intermediate trend becomes long term. These
designations are all relative, and can be influenced by such things as the
Period of time being studied or the type of trading being done. Those trends
that have been drawn with the heavier lines
term trends while those drawn with lighter lines are shorter term.
‘The OP. Index also forms trends. These may be up, down or horizontal as
with the Wyckoff Wave, and also may vary from short to long term, The trends,
lentified in the O.P. are defined in the same manner as with the Wave. The
‘only real difference is thatthe trends in the Waveare trends of price action and
the trends in the O.P. are trends in volume action
Once the trends have been determined, the next step is to investigate their
effect on market action. As an example of how this is done, consider the trend.
in effect from column fifteen through column twenty-five. This isa down trend
‘whose supply line is based on the rally tops in columns fifteen and twenty. The
Parallel oversold line passes through the reaction low between columns
eighteen and nineteen
As long as the market's action is contained within the defined channel, the
{rond, inthis case intermediate in nature, is ddwn. Therefore, maintaining oF
perhaps adding to short positions would be in order. If this were an uptrend,
the same would be true of long positions. itis generally unwise to trade against
the trend of the market. Ifa trader's activities are restricted to the intermediate
term and the trend is down, his positions should be short sales. If a trader is
able to trade both the short and intermediate term trends at the same time
‘may have both short and long positions at the same time. This is because it
very Possible for a short term trend to develop within an intermediate trend,
and for the shorter term trend to be pointing in he opposite direction. Trading
‘opposing trends at the same time requires a good measure of sophistication,
and an even greater measure of discipline. Intermediate trades are based on
ions, and short term trades are based on short term
Considerations. The difficulty is in trying to keep the two totally separated in
‘ones mind and actions.
While the action of the market is confined to a particular trend, a trader's
Course of action remains quite clear. What happens, though, when the
‘Movement of the market penetrates either limit of a trend? These occasions,
are especially important because they indicate or at least warn of an
impending change in direction, In columns twenty-one and twenty-two, the oversold line of the down trend
was penetrated. When this happens, the market is said to be oversold. It has
gone to excess on the downside and is in need of some type of corrective
action, which usually comes in the form of a rally. A similar condition can
