Chapter 4 - Guide to Stock Trends Symbols and Indicators

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Previous < Chapter 3 - What is Technical Analysis?

 

Stock Trends employs a unique set of symbols and indicator values to assist investors in evaluating individual stocks:

 

  •    six ‘Price Trend’ symbols:      and ;
  •     two ‘Trend Counter’ numerical values;
  •     a 13-week ‘Relative Strength Indicator’ (RSI) numerical value;
  •      two current week ‘Relative Strength Indicator’ (RSI) symbols: ‘+’ and ‘-‘; and
  •      two ‘Volume Indicator’ symbols and .

 


 

Price Trend Symbols

 

Six symbols are used to categorize and describe a stock’s ‘price trend’. The six symbols can be divided into two Major trend categories – BULLISH and BEARISH. Each Major trend category has three Minor trend subcategories within it, represented by one of the six symbols.

The symbols are based on the relationship of three values, which are calculated with reference to the stock’s historical price as determined on a weekly Friday close basis for a period of 40 weeks:  

  • The first value is the stock’s Current Price (most recent Friday closing price). 
  • The second value, sometimes referred to as the primary trend, is calculated as a 40-week moving average price. Stock Trends refers to this value as the long-term, or 40-week MA.
  • The third value, sometimes referred to as the secondary trend, is calculated as a 13-week moving average price. Stock Trends refers to this value as the intermediate-term, or 13-week MA. An envelope of +/- 3% around the 13-week MA (the ‘13 week MA Envelope’) is also used in calculations underlying the categorization of each stock. 

 

The Major trend categorization is determined by the relationship of the 40-week MA and 13-week MA values. If the 13-week MA is greater than (above) the 40-week MA, a stock’ Major trend is categorized as BULLISH. If the 13-week MA is less than (below) the 40-week MA, a stock’s Major Trend is categorized as BEARISH.


The Minor Trend subcategories are determined by the relationship of the Current Price and 13-week MA Envelope values. The Minor Trend symbols and their relationships with the Major Trend category, 40-week MA, 13-week MA, 13-week MA Envelope and Current Price are summarized in the following table:

 

 

Trend Symbols – Quick Reference

 

Symbol Trend
Name
Trend
Category
13-week MA
vs.
40-week MA
Current Price
vs
13-week MA 'Envelope'
Trading
implication
Bullish Crossover
(New Bullish)

Bullish
Intersected
(13-wk
above 40-wk)
Above
lower limit
(-3%)
Buy
Signal
Bullish
(Strong Bullish)

Bullish
13-wk
Above
40-wk
Above
lower limit
(-3%)
Buy
Signal
Weak
Bullish

Bullish
13-wk
Above
40-wk
Below
lower limit
(-3%)
Hold/Sell
Signal
Bearish Crossover
(New Bearish)

Bearish
Intersected
(13-wk below
40-wk)
Below
upper limit
(+3%)
Sell
Signal
Bearish
(Strong Bearish)

Bearish
13-wk
Below
40-wk
Below
upper limit
(+3%)
Sell
Signal
Weak
Bearish

Bearish
13-wk
Below
40-wk
Above
upper limit
(+3%)
Monitor/Buy
Signal

The symbols are assigned to a stock based on the relationship of three values: 

1. The stock’s Current Price (most recent Friday close). 

2. The 40-week moving average price (40-week MA). 

3. The 13-week moving average price (13-week MA). An envelope of +/- 3% around the 13-week MA is also used to determine the symbol applicable to each stock.

Each Trend Symbol falls into one of two Trend Categories – BULLISH or BEARISH, determined by the relationship of the 40-week and 13-week MA values. 
If the 13-week MA is greater than (above) the 40-week MA, a stock is categorized as BULLISH. If the 13-week MA is less than (below) the 40-week MA, a stock is categorized as BEARISH.

Individual Trend Symbols are based on:

1. Whether the Trend Category has changed from the previous week, and 

2. The relationship of the Current Price and an ‘envelope’ of plus/minus 3% around the 13-week MA value.

If the Trend Category has changed from the previous week (i.e. the 13-week MA has intersected the 40-week MA line), then the stock will be given either a Bullish Crossover or Bearish Crossover symbol -  or . These are also referred to as “Newly Bullish” and “Newly Bearish” symbols, and are only shown in the 1st week of a Trend Category change. Once a stock has moved into a new Trend Category, in future weeks it will display one of the other two symbols (a solid or empty arrow) within the category until it changes to the other Trend Category.

Definitions:

Current Price = closing price, Friday

40-week MA = 40-week moving average price

13-week MA = 13-week moving average price

13-week MA Envelope = 13-week moving average price, plus/minus 3%

  

 


 

Major Trend Categories

 

BULLISH

The 13-week MA is above (greater than) the 40-week MA.

 

BEARISH

The 13-week MA is below (less than) the 40-week MA.

 


Minor Trend Sub-categories

 

Short-term price movement is represented in the interplay of a stock’s current price with the 13-week moving average. More precisely, Stock Trends calculates an "envelope" of 3% around the 13-week moving average. This envelope filters out some short-term price fluctuations by demanding a more definite penetration of the intermediate-term trend line.

The use of this moving average “envelope” makes the Stock Trends system of categorization less sensitive to short-term price volatility. One of the concerns when a technician employs a system of moving averages is the level of price “noise” the system experiences. Because price patterns are often erratic, the use of a device like a moving average envelope corrects for this volatility and demands a more definitive price movement to trigger the trend signals.

 


 

 BULLISH Sub-categories

 Bullish Crossover 

  • The stock has changed from BEARISH to BULLISH. The 13-week MA, which was below the 40-week MA a week previous, has now moved above the 40-week MA. A stock in this sub-category is in the 1st week of its new BULLISH major categorization.

  • Trading implications: often considered a good trade entry signal.

 

 Bullish 

 

  • The closing price is above the lower limit of the 13-week MA envelope (i.e. greater than 13-week moving average price - 3%).   This indicates that the short-term bullish trend of the stock’s price remains relatively strong.

  • Trading implication: generally considered positive in terms of both trade entry and holding.

 

 Weak Bullish 

 

  • The closing price is below the lower limit of the 13-week MA envelope (i.e. less than 13-week moving average price - 3%). This indicates that the short-term bullish trend is weakening, and will ultimately result in a Bearish Crossover unless the stock’s price can recover above the 13-week MA envelope.

  • Trading implication: generally still considered positive in terms of holding, although it can be a strong exit signal. At the minimum, this alert calls for a review of the holding.

 


 

 

BEARISH Sub-categories

 

 Bearish Crossover 

  • The stock’s Major Category has changed from BULLISH to BEARISH. The 13-week MA, which was above the 40-week MA a week previous, has now moved below the 40-week MA. A stock in this sub-category is in the 1st week of its new BEARISH major categorization.

  • Trading implications: generally considered a trade exit signal.

 

 Bearish 

 

  • The closing price is below the upper limit of the 13-week MA envelope (i.e. less than 13-week moving average price + 3%). This indicates that the short-term bearish trend of the stock’s price remains relatively strong. 

  • Trading implication: generally considered a negative signal for holding. Trade exit signals already triggered.


 Weak Bearish 

  • The closing price is above the upper limit of the 13-week MA envelope (i.e. greater than 13-week moving average price + 3%). This indicates that the short-term bearish trend is weakening, and will result in a Bullish Crossover at some point unless the stock’s price falters below the 13-week MA envelope.

  • Trading implication: generally considered an alert that the bearish trend has abated, which often implies a trade entry signal.

 


 

Stock Trends Illustrated

What follows is an example of interpreting Stock Trends’ indicators in analyzing the stock price of Air Canada (AC).

 

 

 

 

On August 19, 1999, the 13-week MA crossed above the 40-week MA. Here, AC is tagged with a Bullish Crossover  symbol. Stock price: $7.50. The stock was tagged with a Bullish  symbol over the next few months, as the stock price rose to a high of $13.10.

On January 13, 2000, AC’s closing price ($10.30) was more than 3% below its 13-week MA; although the 13-week MA remained above the 40-week MA. AC was therefore tagged with a Weak Bullish  symbol. The stock retraced back to a low of $7.80 before recovering along the bullish trend, turning back to a Bullish  symbol on February 3, 2000. Stock price: $11.20. The bullish trend then pushes the stock to a high of $18.30 at the end of February before again retracing.

 

On May 4, 2000, the closing price of AC was $14.10, more than 3% below the 13-week MA. AC was again tagged with a Weak Bullish  symbol, another signal to be on alert for a possible sell. The stock again rapidly recovered, reverting to a Bullish  symbol and hitting a high of $21.50 on May 26, 2000. The share price stalled and traded over a trading range during the following summer months.

 

On August 10, 2000, AC again closed more than 3% below the 13-week MA. The stock was labeled with a Weak Bullish  symbol at $18.50. The stock held until the beginning of September, after which it dropped precipitously.

 

On October 26, 2000, after 62 weeks of a Bullish Major trend (  or ), AC’s 13-week MA crossed below its 40-week MA. AC was tagged with a Bearish Crossover  symbol at $15.15, after the stock rallied from a low of $12.10 earlier in the month. AC did rally a bit more to a high of $17.50 (briefly signaled by a Weak Bearish  symbol), but the stock remained largely Bearish  along its long descent to a bottom of $1.64 in October of 2001.

 

On November 22, 2001, AC was tagged with a Weak Bearish  symbol, with the stock rising to a level greater than 3% above the 13-weak MA - stock price: $4.90. This rally kept AC as a Weak Bearish  stock for 14 of the following 18 weeks.

 

On March 28, 2002, after 74 weeks of a Bearish Major trend (  or ), AC’s 13-week MA crossed above its 40 week MA, closing the bear phase at $6.91 with a Bullish Crossover  symbol.

 

 

The Air Canada Stock Trends Story

 

Price advances during Bullish phase August 19, 1999 until October 27, 2000: $7.50 - $15.15. AC reached a high of $21.50 during the phase.

 

Price declines during Bearish phase October 26, 2000 until March 28, 2002: $15.15 - $6.91. AC reached a low of $1.64 during the phase.

 

This example illustrates how trend analysis attempts to capture share price appreciation after a new trend has been established. Trend followers forgo price appreciation in the early stages of a bull trend, and certainly do not attempt to pick a bottom. Here, AC’s more recent rally from a bottom of $1.64 to $6.91 is forgone. The premise is that once a trend is established it will support further price gains. Also, trend analysis lags in capturing optimal exit points, as price declines after a Bull top will be absorbed until a new Bear trend is identified. Here, the stock dropped from the $19 level to the $15 level until AC’s Bear trend was labeled. However, earlier alerts are provided by the Weak Bullish  symbol, which in this example was triggered at $18.50 on August 10, 2000. Trading the trend demands that trends be identified according to set parameters and that the lagging nature of these signals will result in forgone trading profits early in a bull phase, and potentially lost trading profits late in a bull phase. This trading strategy focuses on maximizing trading profits in the middle portion of a bull trend.


 

What is special about a moving average crossover?

 

Every stock exhibits trading patterns or trends, and technical analysis studies have found that moving average crossovers can indicate a significant change in trend. However, sometimes a moving average indicator is not the best tool to reveal what’s going on. The crossover may reveal only that the stock has been moving in a trading range for a period, and the short and long-term averages are moving close to each other.

 

In many situations, however, stocks have been clearly moving in one direction for some time, and a crossover is an alert that the trend has changed. Although a crossover is a lagging indicator, it does provide confirmation in many situations. The previous Air Canada analysis is a good example. The crossover of the 13-week moving average above the 40-week moving average properly signaled a change in AC’s long-term trend. Again, the crossover is a lagging signal, and in this example it did not capture the bullish move until the price had already risen from $6.50 to $7.50, or in the more recent rally, from $1.75 to $6.91. A trend-following trader gives up the profits of early price movement to capture the later stage of a bullish move. In the AC case, this would mean - in the best trading scenario - buying the stock at $7.50 and selling at $15.15.

The theoretical premise of trend analysis – that stocks trend in one of three possible directions – gives us a deductive springboard for charting stocks systematically. If we identify situations where a change in trend has been defined, we can make some probability assignment about the trend that follows. The precise moment of that definition will depend on the parameters employed to calculate the intermediate and long-term moving averages (Stock Trends uses an intermediate 13-week MA and a long-term 40-week MA), but once it has been defined we know that one of two possible trends will follow. A Bullish Crossover () indicates that the trend is changing from Bearish to either a Bullish or flat trend. Obviously we are looking for situations where a Bullish trend evolves.

 

Readers should remember that Stock Trends is merely a tabular representation of a moving average study. It is designed to help investors look for stocks that might exhibit the kind of condition the Air Canada example illustrates. But not all stocks fit the same pattern. Many crossovers do not properly signal reversals of a Bear trend to a Bull trend. Some herald a period of channel or range trading, a nasty scenario for trend followers. Readers must learn to recognize the ones that have a better probability of building price momentum and a new concerted Bull trend. This requires a systematic approach to testing alternative trading theories and the use of Stock Trends’ other indicators - the Trend Counters, Relative Strength Indicator and Volume tag.

 


 

Trend Counters

Two Trend Counter values are used to communicate the number of consecutive weeks a stock has been labeled with its current price trend indicator and the number of consecutive weeks the stock has been labeled with its current Major Trend category (Bullish or Bearish). The two values appear immediately to the right of the Stock Trends indicator symbol and are separated by a ‘/’.

Because Stock Trends indicators are symbolic representations of a stock’s historical price performance, it is important to distinguish trending stocks by determining how long a trend has been identified. The longer a trend has been in place, the more definitive the trend is considered to be.

 

 

Minor Trend Counter

The first trend counter value is referred to as the Sub-category, or Minor Trend counter, and denotes the number of consecutive weeks a stock has been labeled with its current Stock Trends indicator symbol (, or ). Note: by definition, Bullish Crossover  and Bearish Crossover  indicators can never appear for more than one consecutive week, although it is possible for a Bullish Crossover to occur in the week immediately after a Bearish Crossover , and vice-versa.

 

 

Major Trend Counter

The second trend counter value (separated from the first value by a ‘/’) is referred to as the Major Trendcounter, and denotes the number of consecutive weeks a stock has been in its current BULLISH or BEARISH Major Trend phase.

 

For example,  5/25 means the stock has been tagged with the current Weak Bearish indicator for 5 weeks and has been tagged with one of the Bearish category indicators (  or ) for 25 weeks. A  19/43 means the stock has been tagged with its current Bullish indicator for 19 weeks, and has been tagged with one of the Bullish category indicators (, or ) for 43 weeks.

 

 


  

Relative Strength Indicator

 

The Relative Strength Indicator (RSI) reveals the strength of a stock’s recent price movements relative to the market's benchmark index - the S&P 500 Index for U.S. stocks, the S&P/TSX Composite Index for Canadian stocks - over a period of 13 weeks and during the most current week. 

 

The RSI is made up of two parts, a numerical value followed by a ‘+’ or ‘–‘ sign. The numerical value is indexed to a base of 100 for easy comparisons and is calculated by comparing a stock’s price movement relative to the benchmark index over a period of 13 weeks. Stocks with an RSI above 100 are outperforming the benchmark index over the past 13 weeks, while those with an RSI below 100 are under-performing the Index during that period.

 

The RSI also shows the degree to which a stock is leading or lagging the general market. Because it has a base of 100, the RSI converts easily to a percentage change: just subtract 100 from the current value. For example, a stock with an RSI of 115 has outperformed the market by 15% over the past 13 weeks, while a stock with an RSI of 85 has underperformed by 15%. Remember, this comparison is always over the last 13 weeks. So, if a stock’s price is changing more slowly in recent weeks than it was 13 weeks ago, the RSI will decline in subsequent Stock Trends tables.

 

The RSI is calculated as follows:

(1)     Calculate the ratio of the stock’s price this week to the benchmark index close this week:

14.95 / 6557.57 = 0.0022798

(2)     Calculate the ratio of the stock’s price 13 weeks ago to the benchmark index close 13 weeks ago:

17.30 / 7738.11 = 0.002235688

(3)     Divide (1) by (2) and multiply by 100, resulting in the RSI value: 

0.0022798 / 0.002235688 x 100 = 102

 

Relative Strength +/- Indicator 

The second part of the RSI is based on a stock’s price movement relative to the benchmark index in the most current week. A stock that has outperformed the Index on the week would be tagged with a ‘+’, while any stock that underperformed the Index on the week would be tagged with a ‘–‘. For example, if a stock has advanced 8% on the week, while the market advanced only 3%, the stock would have a ‘+’ beside the RSI value. If a stock advanced only 2% and the market advanced 3%, it would display a ‘–‘ beside its RSI value. Alternatively, if a stock declined 3% on the week, while the market declined 5%, the stock would qualify for a ‘+’ beside the RSI value denoting its relatively superior performance. However, if the stock had declined more than 5%, it would show a ‘–‘.

The (+/-) relative strength indicator is extremely useful in both advancing and declining markets, as it isolates stocks that are not moving with the prevailing market trend.

 The RSI is a comparative momentum indicator – it will often oscillate over time as the stock price advances, stalls, or falters. Generally, stocks with a rising RSI can anticipate even further price advances. This premise is the foundation of momentum trading.

 

Important to note is that the RSI indicators are not weighted. They do not compensate for the volatility of a stock, and as such, the RSI values of a volatile penny-stock will reflect its extreme movements. Readers should distinguish between less volatile stocks and ones that demand more caution in the interpretation of the indicators.

 


 

Volume Indicator Symbols  

Volume is a trend follower’s best friend. It is the fuel that supports a trend; it is the barometer of the strength of any price movement. Readers should pay close attention to the trading volume on any stock, whether they are thinking of buying, holding, or wondering when to sell.

Stock Trends offers some assistance by tagging stocks with high and low volume indicator symbols based on the trading volume over the trading week:

 

High volume  - the stock’s [current weekly trade] volume exceeds 200% of its average weekly volume (13-week average). Trading implications: Stock Trends’ high volume indicator (), concurrent with a bullish crossover indicator (), has proved to be a highly successful identifier of stocks verging on a Bullish trend. Generally, high volume should support price advances, and at times can precede or anticipate them.

 

Low volume 

The stock’s [current weekly trade] volume is 50% or less of its average weekly volume (13-week average). Trading implications: The low volume indicator () concurrent with an advancing stock offers both a warning (for bullish ( or ) stocks) and a possible trading signal (for bearish ( or ) stocks).

 


 

These indicators are intended to assist in analyzing stocks with an average weekly volume greater than 100,000 shares traded. Although all stocks are evaluated for the volume indicator, less liquid stocks tend to have more volatile trading patterns and will trigger these indicators more frequently. For example, a stock that has been trading an average of 5,000 shares a week will get a high volume tag with 10,000 shares traded, a low volume tag with 2,500 shares traded. The difference could be a single trade. Obviously, a stock trading an average of 500,000 shares a week requires a more definitive change in the actual number of trades. Subscribers to Stock Trends Weekly Reporter will find that weekly number of trades data is listed in many of the reports: this piece of information helps determine the character of the traded volume.

Remember that stocks are tagged if they deviate from arbitrary levels ( when 200% or more of average weekly volume and  when 50% or less of average weekly volume). Some stocks develop a strong trading pattern without triggering the Stock Trends trading flags and deserve just as much attention. Although there is considerable volatility when measuring weekly volume, the 200% to 50% deviation of the weekly average is a good indicator of the strength or weakness of the trading.

Strong volume should support a price movement. For this reason, low volume is a warning signal. For example, if a stock is making new highs and is tagged with a low volume indicator in Stock Trends, investors should recognize this as signal of withering support.

 

Next > Chapter 5 - How to use Stock Trends

 Stock Trends Handbook - Contents

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