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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • A Candle Trigger For Market Tops 1 comment
    Apr 21, 2013 8:55 AM | about stocks: SPY, AAPL, QQQ, VWO

    Some of today's most popular technical indicators or trading methods can be traced back to a specific inventor but they are often not given credit by today's traders and analysts. As an "old school technical analyst," I have always felt it was important to give the inventor the proper credit

    Some of you may be familiar with what is referred to on most quote systems as the TRIN but should really be called the ARMS Index after its creator, Dick Arms. I fought this battle many years ago on the precursor to CNBC, and they did change it for a while, but it did not last.

    That is the same reason that I try to give Joe Granville credit in my articles about on balance volume or Welles Wilder when I talk about the RSI or ADX. I was first exposed to candle charts in 1989 when I was given a copy of The Japanese Chart of Charts by Seiki Shimizu during a speaking trip to Japan.

    Though I found this book quite interesting, I did not really start to apply the methods until much later. At the time, candle charts were virtually unknown in the US but over the next few years Steve Nison and Greg Morris both wrote excellent books on candlestick charting. Then I was introduced to a candlestick formation that I have found to be one of the most valuable in identifying market tops or bottoms.

    I had always been intrigued by doji formations, which is characterized by the open and close being at approximately the same value. It typically is interpreted as a sign of indecision but then John Person shared with me his high and low close doji triggers, which are in his book Candlestick and Pivot Point Trading Triggers. The HCD is discussed is also discussed in this article by John.

    These do not form at many market highs or lows, but when they do, I have found them to be extremely helpful in determining both entries and exits. The low close doji or LCD will be the focus of this week's article, and I will look at the high close doji or HCD in a subsequent article.

    chart
    Click to Enlarge

    As with many technical methods, the longer time frame charts give the most reliable signals. Volume plays an important role in my work, and when volume analysis is added to the LCD signals, it often validates them, making the investor or trader even more confident. Of course, Joe Granville's on balance volume is my favorite volume indicator, and it is particularly insightful when it is analyzed in multiple time frames.

    In the upper left of the chart is a typical doji formation. When the close of the next candle is below the low of the doji, then a low close doji signal (LCD) is triggered. In order to be valid, John's method requires that the lower close must occur within three bars after the doji. For those selling short based on this trigger, a stop is placed above the doji or most recent high.

    This monthly chart of the Dow Industrials shows that a doji (see circle) was formed in October 2007 as the Dow opened at 13,895, had a low of 13,407, and closed at 13,930. The high for the month was 14,198.

    In November, the Dow Industrials closed at 13,371, which was below 13,407 so an LCD was triggered. On the bottom of the chart, it is evident that the volume increased in November, point 1, which indicates there was more selling in November than there was buying in October.

    chart
    Click to Enlarge

    In this second chart, I have included the monthly OBV with its 21-month WMA. I have highlighted the doji at point 1. As I noted, the November close generated an LCD and the Dow also closed lower again in December.

    The close in January 2008 at 12,650 (point 2) was also below the prior two month's low. This weakness was confirmed by OBV as it dropped below its WMA (line 4) and its uptrend, line a, was also broken (point 4). The OBV stayed below its WMA until the end of July 2009.

    chart
    Click to Enlarge

    The weekly chart of the Spyder Trust (SPY) covers from early 2011 though October 2012. The week ending May 13, 2011, point 1, a doji was formed. The OBV had peaked in early March and then formed a bearish divergence, line a, as it was forming lower highs while SPY was forming higher highs.

    The week the doji formed, SPY closed at $133.39 and the OBV dropped below support (line 2). This confirmed the divergence, point 2. The low of the doji was $133.39 and the next week another doji was formed with a close at $133.61. The following week, SPY closed at $133.51, which was still above the first doji low.

    Finally the week ending June 3, 2011, SPY closed at $130.42 triggering a low close doji as it was below the low of both dojis. The stop would have had been above the early May high at $137.18 and $137.86 would be 0.5% above the high.

    The SPY eventually made a low of $107.43 in early October 2011. The rally continued until the end of March 2012 and while a doji did form in early 2012, there was never a close below its low. The week ending March 30, another doji did form, point 3, with a low of $139.09.

    The following week, the SPY made a new high at $142.21 and then closed a bit lower but well above the doji low. However, the second week after the doji, the SPY gapped lower and closed the week at $137.14, which was well below the doji low.

    The Spyder Trust (SPY) moved sideways for the following three weeks before it dropped sharply. The OBV stayed above its WMA until the week ending May 18, and in this instance, was not helpful in confirming the doji. The SPY made a low of $127.14 in early June and by the middle of the month, the OBV was back above its WMA.

    chart
    Click to Enlarge

    One of the dominant stock stories since last September has been the plunge in the stock of Apple, Inc. (AAPL). The weekly OBV of AAPL broke through its resistance (line a) in February 2012 as the stock accelerated to the upside.

    As AAPL pushed above the $700 level in September, it formed a doji (point 1) with a high at $705.07, which was very close to the quarterly R2 level at $705.21. The close the following week at $667.10 was well below the doji low of $693.62.

    Two weeks after the LCD, the OBV dropped below its WMA and the next week it also broke its uptrend, line b. The OBV did not form any divergences at the highs and oftentimes it will not. The daily OBV also did not form any divergences but a daily doji was formed on September 20 and AAPL closed below the doji low two days later.


    Click to Enlarge

    Next, let's look at a weekly chart of the Vanguard MSCI Emerging Market ETF (VWO), which formed a doji the week ending August 6, 2012, with a high of $43.04 and a low of $42.20 (point 1). The next week, VWO closed at $41.31, triggering the LCD. A stop 0.5% above the high would have been at $43.26. Over the next nine days, VWO hit a low of $40.06 before spurting to the upside with a high of $45, which would have hit the stop.

    I included this example to reinforce the reality that nothing works all of the time but also to illustrate that all trades need to be managed when they move in your favor. The fact that the weekly OBV had just moved above its WMA as the doji was forming might have kept you out of the trade.

    At the end of April 2011, VWO formed another doji, point 1, and the following week VWO closed at $48.74, which was well below the doji low of $49.95. The formation of the doji was accompanied by the formation of a negative divergence in the OBV, line a, as it made significantly lower highs.

    The OBV marginally broke its support, line b, several weeks before the doji was formed. After the LCD was triggered, the OBV dropped below support and its previous low (point 5).

    The stop on a short would have been above the high from the week after the doji at $50.92. Seven weeks after the LCD, VWO stabilized in the $46 area and rallied as high as $49.65 before forming a second doji at point 4.

    VWO plunged the next week and closed at $43.65, which was well below the second doji low of $47.61. By early October, VWO had made a low of $34.21

    NEXT PAGE: Tech Sell Signal In September

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (1)
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  • Mrnomad
    , contributor
    Comments (358) | Send Message
     
    Interesting article but after weeks of programming visual basic macros in Excel to track OBV and try to use it as a signal, I found it completely worthless. The project extracted data from TOS every minute and correlated it to price action. Having achieved no discernible results, I then captured the most recent ATM call & put strikes on the 38 tickers I was using for this project along with OBV. Once again, no "actionable" signals were conveyed. I concluded that Granville was ahead of his time, but his time was 1970 when computers were in their infancy and were able to do much less than my Iphone today. Chaikin, MACD, and Lin Reg 50 seem to be far more predictive and everyone is looking for divergences. Most people find them after they have occurred and then extol how smart they were for finding Sunday's football results on Monday. Thx.
    10 Jan 2014, 09:53 AM Reply Like
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