The goal of the MarketColor table is to provide insight to the markets current position in respect to different statistical indicators. The indicators presented represent a cross section of studies that show the markets value in relation to moving averages, momentum, overbought/oversold oscillators, directional movement, turning points, extremes, and volatility.
Previous Days Data - This section shows the contracts previous sessions High, Low, Close along with the Net Change and Percent Net Change as a reference point for the following indicators.
Moving Averages - MA - Show the average price over the specified period. MARKETCOLOR uses a simple method based off the closing prices for the 13, 26, 50, 100 and 200 day averages. Moving averages (MA) are one of the most common forms of technical analysis and an effective tool in identifying the trend of a market.
MARKETCOLOR provides different average lengths to coincide with different trend time frames. Simple trading approaches track crossovers of the MA for buy and sell signals. When a shorter time framed MA crosses above a longer time framed MA it is a Buy signal. The reverse is true for a sell signal. These simple trading systems work well in trending markets but tend to get chopped up in sideways or consolidating markets.
The MA will have the following different color codes; GREEN, BLUE, AQUA, BROWN, PINK, RED, ORANGE and YELLOW.
Directional Movement Indicators DMI / ADX
Directional Movement Indicator (DMI) - Directional movement is defined as the difference between the extreme part of the current period (today) that falls outside the range of the previous period (yesterday). The DMI indicator compares two oscillators the +DM and the -DM. Price movement is best measured in proportions rather than arithmetic numbers. This enables us to make a more realistic comparison between two periods or two markets of differing price magnitude. For example, a +DM measurement of 1.00 point for the S&P 500 futures trading at 900.00 would have a very different implication than a 1.00 move for a Eurodollar trading at 94.00. The Indicator solves this problem by comparing the +DM and -DM with the markets "true range". This is defined as the maximum range that the price has moved either during one days trading or from the close of the previous days trading to the extreme point reached the following day. This means that the "true range" in price is the greatest of the following:
- The distance between todays high and todays low.
- The distance between yesterdays close and todays high.
- The distance between yesterdays close and todays low.
+DM refers to up days for x number of periods and -DM refers to down days for x number of periods. It is important to note that directional movement can only be positive. This means that the -DM refers only to down days, not a negative number. The difference between +DM and -DM is the key figure because this reflects the true direction of the price movement. For instance, if +DM and -DM are identical it would mean that up days more or less offset down days. In other words, there was no directional movement at all. By the same token, if the direction is up for 10 to 12 days the +DM would have a high value and the -DM would be very low, resulting in a very high directional movement or DX.
The DX is calculated by dividing the difference between +DM and -DM by the sum of the +DM and -DM. The sum reflects the total of the percentage of days that experienced directional movement; the difference is the net result of the type of movement, either plus or minus. The DX will always fall between 0 and 100. The higher the number, the greater the directional movement. The direction of the price movement has no bearing on the DX itself, since the DX indicates only trending characteristics. A more precise analysis of the indicator is to smooth out the action of the DX to make it indicative of price movements to both the high and low extremes. To do this an average of the DX is taken known as the ADX (average directional movement index).
Average Directional Movement Index (ADX) - The ADX measures the directional changes only and not the direction of the change. Therefore, in a bull market a peak indicates a reversal to the downside, but in a bear market it reflects a change from down to up. The larger the differences between the highs and lows in the ADX, the greater the reactions resulting in greater trending characteristics. ADX is exclusively a rating devise and should only be used as a measurement of directional movement. The greater the distance between the ADX and zero the greater the directional movement of the commodity.
The "equilibrium point" is when +DM and -DM are the same level. Buy signals are generated when +DM and -DM cross. This means that good tradable directional movement is not only just a question of straight up and down price movement, but also movement in excess of the equilibrium point. Crossover and other trend following signals should be taken in commodities with high ADX ratings (above 50). Benchmarks similar to that of the RSI should be used. As a firm ADX level reflects a strong degree of directional movement, not the direction itself. If the ADX is at an extreme reading (above 80), this means that the trend has been in force or some time and is not a good point for entering new trades. The high ADX reading is a form of overbought or oversold where trades in the direction of the prevailing trend are usually not profitable. When the ADX is below both DMs or near its lower extreme (20-25 range) trend following signals should be avoided, as little or no directional movement is indicated.
Other points to watch on the ADX. When the ADX reverses from an extreme high it is a signal that the market is ready to consolidate. Conversely, when the ADX is at a low level and starts to reverse it is a signal that a trend move is in the making. A near zero reading in the ADX is a signal to be on alert for an impending trend move.
Overbought/Oversold Oscillator - RSI
Relative Strength Index (RSI) - Indicates momentum only. It should never be confused with the principle of Comparative Relative Strength, where one market or index is divided by another. The RSI is a front weighted, price velocity ratio for a specific market. In effect, it is a momentum indicator that compares the price of a market relative to itself and is, therefore, "relative" to its past performance.
The RSI is an oscillator that fluctuates between the extreme levels of 0 and 100. The magnitude of the RSI movements vary inversely with time. The shorter the period the more extreme the oscillation; the longer the period the more moderate the oscillation. Overbought and oversold benchmark parameters vary with the time span used in constructing the RSI. MARKETCOLOR tracks the 5 and 13 day periods. The default benchmark values for a 5-day period is 80-20, And for a 13-day period the benchmarks are 70-30.
The RSI can be used to spot top and bottoming action of a current price move. When the RSI moves into the benchmark extreme it is said to be overbought or oversold. A 13-day RSI moving above 70 shows an overbought market, and below 30 a market that is becoming oversold. Since momentum typically turns ahead of price, these moves into the extremes often give advance warning of deterioration or strengthening in the underlying technical structure. Using benchmarks to denote overbought/oversold conditions is most effective in sideways or consolidating markets. For trending markets the indicator is not as useful and can be misleading. Under these circumstances the divergence of the RSI from the price trend is the value signal from this indicator.
A divergence of the RSI is when the price action is making higher move highs and the RSI is deteriorating or the RSIs peak to peak move is successively lower. When a divergence like this occurs it is a signal of an impending turn in trend. The opposite is true for bear moves.
Momentum Indicator - ROC
Rate of Change ( ROC) - is a simple concept that measures the acceleration or deceleration of a price trend over time. ROC compares todays price with yesterdays. For example, a 13 day ROC is calculated by comparing todays price with the price of 13 days ago. ROC is centered around zero; it is positive when the Price is above its prior value and negative when its below.
ROC is a direct measurement of market movement and may simply be used to measure the percent change of a market between two bars identifying the "slope" of the market. It can also be used as an oscillator type of study defining overbought/oversold conditions to identify when the market has attained a significant move. The problem with ROC in this capacity is that it is an unbounded study making it difficult to set overbought/oversold benchmark extremes.
ROC, like other oscillators, may be used to identify divergence or confirmation of a new price extreme. A divergence indicates the market has lost momentum or has become highly volatile and is likely to consolidate or reverse. Confirmation between ROC and price indicates the market is still accelerating away from its moving average and follow through is likely. A difficulty in using divergence analysis on ROC is its calculation is based off of two specific dates and changes from bar to bar in the earlier date will affect the value of ROC to the same degree as changes in the current price.
Trend Deviation Indicator - MACD
Moving Average Convergent Divergent (MACD) - is a trend deviation oscillator that measures the difference between two exponential moving averages of different lengths. The two moving averages have different sensitivities to market action providing an indication of the development of a change in market environment, such as the emergence of a new trend or reversal.
The MACD is a simple and effective trend following tool. When the MACD crosses 0 it indicates the shorter, more sensitive, moving average is crossing over the longer, slower, moving average. Convergence of the two exponential averages, identified as the MACD moving toward 0, indicates a termination of a trend or impending consolidation. The divergence of the two exponential moving averages, movement away from 0 by the MACD, indicates the shorter/faster average is accelerating away from the longer/slower average and is associated with a strengthening trend. A cross above zero generates a buy signal while a cross below zero generates a sell signal.
The MACD is an unbounded study enabling it to follow the market as long as the trend is gaining momentum. The MACD can also be used as an overbought/oversold indicator by measuring the difference between the two averages. The unbounded nature of the indicators however makes it difficult to define benchmark overbought/oversold levels.
Turning Point Indicator FSTOCH / SSTOCH
Stochastic Indicator FSTOCH / SSTOCH- measures the relative position of the closing price within a given interval. The Stochastic method rests on the assumption that prices tend to close near the upper part of the trading range during an uptrend and near the lower part during a downtrend. This range refers to the trading period under consideration. As the trend approaches a turning point, the price closes further away from its extreme (i.e., away from the daily high in a rising market and from a daily low in a declining market). The objective of the Stochastic formula is to identify these points in an advancing market when the closes are clustered nearer to the lows than the highs, since this indicates that a trend reversal is at hand. For down markets the process is reversed.
The indicator is presented in both a Fast and Slow method. Fast %K (FSTOCH) identifies the highest high, lowest low, and the current price for a specific period. It subtracts the lowest low from the current price, then divides the difference by the range, (where the range is the highest high - lowest low). The result becomes the Fast %K value. The indicator continues to calculate Fast %K values by excluding the oldest bar and including the next more recent bar before repeating the above calculation. Fast %D is a moving average of Fast %K values. The %K is the more sensitive of the two oscillators, but it is the %D that carries the greater weight and gives the major signals. It is important to note that the Stochastic differs from other indicators in the MARKETCOLOR analysis in that it requires the high, low and close for the trading period in question. The %D is a smoothed version of %K.
Slow Stochastic (SSTOCH) is a smoothed variation of the regular series. In its calculation the original %K line is eliminated and the old %D substituted. The Slow %K is equal to the Fast %D. The Slow %D is a moving average of Slow %K values. The resulting indicator is less volatile and subject to whipsaws.
The Stochastic Indicator, therefore, takes the form of two oscillators. The %K and the %D always fall in the range of 0 to 100, like the RSI. A reading near 80 is generally regarded as overbought and 20 as oversold. Remember that all signals from any momentum indicator should be used as an alert or warning of an impending trend reversal. Momentum measures velocity, not price trends. Price measures price trends. Divergence between the %D and price are similar to the RSI Indicator. Additional signals are made when the %K crosses above or below the %D similar to the Moving Average Indicator.
Trading Range Extremes - ATR
Average True Range - ATR In an effort to establish a sessions price range extremes an average of the markets true range is taken. The "true range" in price is the greatest of the following:
1. The distance between todays high and todays low.
2. The distance between yesterdays close and todays high.
3. The distance between yesterdays close and todays low.
In the MARKETCOLOR analysis the average range is taken for a 1 week and 1 month intervals. This range is then added and subtracted from the sessions close providing potential price move extremes. The average extremes should be used as support and resistance number in conjunction with the service price map number series.
Dynamic Channels Bollinger Bands and Keltner Channels
A Bollinger Bands consists of two lines, one line displayed above and the other below the user-specified moving average. The distance between each line and the moving average represents the number of Standard Deviations of each price away from the average, multiplied by a user-specified constant.
Keltner channels compare todays prices with yesterdays prices. An absence of new highs indicates a down-trend. An absence of new lows indicates an up trend. In conjunction with this method of trend identification, the Minor Trend Rule is used. The Minor Trend Rule states that the minor trend is bullish if the daily trend sells above its most recent high; conversely, the minor trend is bearish if the daily trend sells below its most recent low.
Keltner channel study consists of a moving average (center line) and two channel lines. The channel lines are drawn by adding and subtracting from the current moving average value the product of a constant (percent/100) multiplied by the average true range of each bar.
MARKETCOLOR combines these studies to highlight market extremes and momentum swings.