Archive for February, 2013

Williams %R Indicator – Another Excellent Technical Trading Tool – by Mike Estrey

Many stockmarket technical analysts and chart watchers use the well known Relative Strength Index (RSI) as a reliable overbought/oversold indicator, but there are various other highly useful tools out there, and an excellent and simple one is the Williams Percent Range technical indicator.

This was developed by Larry Williams, an expert in trading and systems analysis, and is a slightly different way of evaluating overbought and oversold market conditions. As with the RSI the %R always falls between a value of 100 and 0 (it is actually calculated as a negative figure in some software systems), and two horizontal lines can normally be defaulted to represent the -20% and -80% overbought and oversold levels. RSI watchers often use 30 and 70 as the equivalent levels, but these are not set in stone for either indicator.

The Williams %R formula

The Williams %R indicator uses highs and lows within its calculation, so this is a bonus, and it is inverted by multiplying it by -100 to give the ‘low’ and ‘high’ figures.

The formula which is preset on most software systems is:

((Highest high value (High, Number of periods chosen) – Close)/(Highest high value (High, number of periods chosen) – Lowest low value (Low, Number of periods chosen))) * -100

Williams’ original analysis focused on 10 trading days as the number of periods chosen to determine a market’s trading range, and then the calculation was made by reference to where the current day’s closing price fell within that range.

There are some similarities with another well known indicator, the Stochastic, (which can be used both as a trend indicator or an overbought/oversold measure), but the Williams %R does not have any smoothing (or fast and slow lines if you like)

A value of 0% on the Williams %R shows that the closing price is the same as the period high, but often the indicator will remain very close to 0% for days on end in a strong bull move where the closing prices are near to period highs. A value of -100% shows that the closing price is identical to the period low, and the opposite scenario is common here.

What this indicator really does that is very good is to show the difference between the period high and today’s closing price within the trading range of the specified number of periods chosen.

It tends to work best in trending markets, and just as with the RSI it is possible to look for divergences between the %R and underlying price movements.

What length of time period to use

Although the indicator was developed on a ten day period length, many software systems now use a 14 day default (same as the RSI). As with all technical analysis, there are no hard and fast rules, and the shorter the period chosen the more volatile the outcome. To achieve less whipsaw action, it is best to use a wider periods range, but this of course results in less signals.

Original trading rules

Larry Williams set the following original trading rules for the indicator:

1 Buy when %R reaches -100%, and five trading days have passed since -100% was last reached, and after which the %R again falls below -85/95%.

2 Sell when %R reaches 0%, and five trading days have passed since 0% was last reached, and after which the Williams %R again rises to about -15/5%.

Some technical analysts simply suggest selling when %R reaches -20% or lower, an overbought level, and buying if it goes below -80%. This is too simplistic, and CFD trades will know that using any overbought/oversold indicator in such a standalone manner is doomed to failure.

The reason is that especially on a trading range breakout, a new trend can immediately become highly overbought and remain so for a long time. The same goes with a big fall (say following a profits warning) which can see a share remaining oversold for a long time while the price continues to trend down – you do not want to be buying then!

It is therefore best, as with all these types of indicators, to wait for the underlying price to change direction before going with the trade. You could quite easily combine the Williams %R with a MACD or TEMA indicator to give you more comfort that you are trading with the trend.

About the Author:

Mike Estrey is the Head of Research for Blue Index, the Day Trading specialists in Contracts for Difference. Foreign Exchange Trading also forms part of their extensive services.

Technical Trading of Stocks

These days, a lot of folks turn toward technical indicators and oscillators to trade stocks instead of looking solely at the fundamentals of a company and its stock. With this type of trading, you are looking for trends on charts and graphs that signal a buy or sell of a particular stock.

There are general groups of technical indicators that can assist in helping you form an opinion on buying and selling stock, options or forex. They are as follows:

  • Trend Analysis – Looking at short and long-term trends to find points where it crosses over the long-term averages.
  • Pattern Analysis – Looking for such things on the charts such as a head and shoulders pattern, triangle patterns, pennants, etc.
  • Trading Ranges – Looking at support and resistance lines and seeking a breakout from the pattern.
  • Relative Strength Index (RSI) – Looking at a stock’s performance recently compared to its historical strength. With this you are looking for overbought or oversold conditions which might suggest a reversal of the trend.

A good place to start reading an introduction on technical indicators and oscillators would be at StockCharts.com with the article: Introduction to Technical Indicators and Oscillators.

For a list of some of the more popular overlays and indicators in use and links to more in-depth information in each, you can look at StockCharts.com at the page: Technical Indicators and Overlays.

Then there is a good article that’s should be a guide for people new to technical trading. This comes from John Murphy, currently with StockCharts.com. He was the technical analyst for CNBC show called Tech Talk. He’s also authored several books on the subject such as “Technical Analysis of the Financial Markets“. You can read up on his laws for technical trading at: John Murphy’s Ten Laws of Technical Trading.

I hope reading through these resources will help give you a better sense of technical trading and help you decide if it’s something for you. At the very least, it’s something you can study and chart on paper for a while and see what works best for you.

If you have a favorite indicator or oscillator that you use and think others would find it very useful, please share more info with us in the comments section.

Solid Stocks to Buy – Visa (V) and J.M. Smucker Company (SJM)

My picks for 2-18-13 are Visa ($V) and J.M. Smucker Company ($SJM).

Both companies have had steady share price growth over the past year and they have both met or exceeded Wall Street’s expectations for earnings in the last four quarters.

For the analysts that follow Visa, there is a good bit of upside to the share price as they are looking for a price in the the mid $170 range at the low end. They also provide a dividend, although the yield is currently only .80%. The analysts continue to revise their earnings per share estimates upward as Visa continues to outperform.

Smucker has been growing at a steady pace for the last five years. From a low of $35.01 to the most recent high of $94.99. They provide a nice dividend that yields 2.30%. Insiders in the company and institutional holders have been holding onto most of their shares as the last 6 months have seen an outflow of only 1.6% and 8.61% respectively.

I see both companies continuing to perform very well and they would be a nice addition to your portfolio.

Down Goes Riverbed – RVBD 2-8-13

Clearly the market didn’t like the earnings report from Riverbed after the close of trading on the 7th. Although they beat revenues forecast and matched the earnings per share expectations, they got hammered in after hours trading. Currently in pre-market trading this morning, they are trading down more than 13%. What seems to have hurt them was that their guidance going forward that it was going to be short of expectations going into it.

The market is funny like that sometimes. You have earnings that beat everyone’s expectations, yet you get killed immediately afterward even though nothing really looks all that bad. I think what’s going on in pre-market this morning is really overdone, so I expect it will make up some ground.

Stock pick 2-7-13 – Magna International – MGA

My pick for 2-7-13 is Magna International – MGA. Their current stock price is $52.96 as of the previous close.

They have been in a holding pattern the last couple of weeks after gaining over $8 in the previous couple of months. Their last three earnings reports had the company beat estimates by a healthy margin and subsequently the stock gained after each of those reports. They should be reporting again within the next month.

In the short-term, the market is looking for the stock to possibly gain up to the $56 range. The analyst covering them from KeyBanc upgraded the stock to a buy back on January 28th and looks for a target price of $61. They said that they are bullish on automotive supplier stocks over the next few quarters.

On the chart, the stock has entered a pennant bullish pattern and is poised to breakout. The stock has been steady so this is a good point to get in before the expected rise.

Stock Pick 2-5-13 – Riverbed – RVBD

My stock pick for 2-5-13 is Riverbed – RVBD and the current price as of Monday’s close is $19.76.

This trade is an earnings play on the upside. The last two dates that Riverbed reported their earnings, they beat expectations by a wide margin. Subsequently, the stock jumped $3.82 from the previous closing price in July and $2 after the close back in October.

The market is currently leaning toward a gain of around $2.40 by looking at the expected price according to the straddle options being traded. This would net you a gain of 10% if the stock trades according to the last few earnings reports.

As always, be cautious when trading into earnings, like we saw with VMWare. However, this may be a good play as the last two times they reported showed. Earnings happen after the close of the market on 2-7-13 so look to purchase between now and the close on the 7th.

 

Stock Chart Trading Indicator Scan Tool

As I’ve searching for interesting and useful trading tools over the years, one I always found interesting to look at was one from a site called StockCharts.com.

On the site they have some predefined scans for various bullish and bearish technical indicators, candlestick patterns, and P&F (point and figure) patterns. The scan looks for the different patterns they have listed for stocks in all the exchanges that they cover over the previous day. When you click on the links, you can see a list of the stocks that meet the pattern criteria.

If there are certain types of chart patterns you are looking for, this can be a quick and easy way to at least get a list of stocks to do further research on. You can get directly to the predefined scan by going to the following link: Predefined Scan