Accumulative Swing Index

Developed by Welles Wilder in his popular technical analysis book New Concepts in Technical Trading Systems, the Accumulative Swing Index (ASI) is mainly used as a divergence and confirmation tool, but can be used for buy and sell signals as well. It was designed to be used for futures trading, but can be used for stock trading and currency trading too. Basically, the Accumulative Swing Index is a running total of the Swing Index (see: Swing Index).

The chart below of gold futures shows the Accumulative Swing Index:


Accumulative Swing Index as a Confirmation Tool

In the chart shown below, the Accumulative Swing Index confirmed Gold's downtrend. Subsequently, when Gold broke the downward trendline, the Accumulative Swing Index confirmed the trendline break as well.

Similarly, the upward move in the Gold futures contract was confirmed by the Accumulative Swing Index and the upward trendline break was confirmed too.

Buy Signal - Accumulative Swing Index

Buy when Accumulative Swing Index breaks above a downward trendline or, in a price consolidation period, above resistance.

Sell Signal - Accumulative Swing Index

Sell when the Accumulative Swing Index breaks below an upward trendline or, in a price consolidation period, below support.

In summary, the Accumulative Swing Index is best used as a confirmation tool with other technical indicators and charting patterns (see: Support & Resistance).

Andrew's Pitchfork

Andrew's Pitchfork, otherwise known as median line studies utilizes the concepts of support, resistance, and retracements (see: Support & Resistance). As is visually depicted below, Andrew's Pitchfork consists of:
  • Handle
  • Resistance Trendline "tine"
  • Median Line
  • Support Trendline "tine"

Steps to creating a Pitchfork
  1. Find a significant pivot or retracement (in the chart above, the lower left corner)
  2. Find the next significant pivot or retracement (the dotted blue line connects the first pivot to this second pivot)
  3. Find the next retracement (in the chart above, the solid blue line starting from the left and going down to the right)
Charting software finishes the pitchfork by creating the upper resistance "tine", the lower support "tine", and the median line. Note: "tine" is the terminology used by the creator of Andrew's Pitchfork, Dr. Alan Andrews.

Interpreting Andrew's Pitchfork

The same rules for support and resistance apply to Andrew's Pitchfork. Look to buy at support and look to sell at resistance (see: Support & Resistance). Also, prices are thought to gravitate towards the median line as depicted in the chart above of the S&P 500 exchange traded fund. The chart above shows the long-term view (1 year 6 months) of the stock market; however, Andrew's Pitchfork can be used for shorter time frames.

Arms Index (TRIN)

The Arms Index , also know as the TRIN - "TRading INdex", (ticker: $TRIN) is an important volume-based confirmation indicator as well as overbought and oversold indicator. The Arms Index has four components listed below:
  1. Advancing Issues on the New York Stock Exchange (NYSE) - $ADV or $NYADV
  2. Advancing Volume on the NYSE - $UVOL or $NYUPV
  3. Declining Issues on the NYSE - $DECL or $NYDEC
  4. 4Declining Volume on the NYSE - $DVOL or $NYDNV

The formula for the Arms Index is simply:

(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

The intra-day 5-minute chart of the mini-Dow futures contract shows the $TRIN:


Interpreting the Arms Index
  • Neutral Reading = 1
  • Bearish Reading > 1
  • Bullish Reading < 1
The trend of the Arms Index is usually more important than whether or not the Arms Index is above or below 1. As can be seen in the intra-day chart above, when the mini-Dow was falling in price, the Arms Index was increasing. At 1.5, a very high Arms Index reading, a trader could take a contrarian stance and buy at the 1.5 level. Of course it would be advisable to see a reverse or bottoming of the Arms Index before taking such action. Also notice that when the mini-Dow is increasing, the Arms Index is increasing as well.

The Arms Index can be used from a longer term perspective. Some traders use moving averages of the inputs into the Arms Index equation. To illustrate: (10-day Moving Average (MA) of Advancing Issues / 10-day MA of Declining Issues) / (10-day MA of Advancing Volume / 10-day MA of Declining Volume) or one could simply take the 10-day Moving Average of the $TRIN.

There are fundamental problems with the Arms Index, and these probems are discussed on the next page.

Problems with the Arms Index

There are mathematical oddities with the Arms Index. To begin, the basic formula of the Arms Index is presented below:

(Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

According to the status quo interpretation of the Arms Index, a reading below one is bullish and a reading above one is bearish. However, what if there was a truly bullish day. For this example, twice as many stocks will be gainers on the day than will be losers. Likewise, twice as much volume was transacted with the stocks that were gainers than was transacted with the losers of the day. To recap, a very bullish day, gainers (Advancing Issues) outpace loser by a 2 to 1 ratio, and institutions are heavily accumulating stock of those gainers by a ratio of 2 to 1, basically lots of Advancing Volume. The calculation would be as follows:

(2/1)/(2/1) = 1.0

An Arms Index reading of one is supposed to be neutral, yet the example up above was extremely bullish. Suppose Advancing Issues were 3 to 1 and Advancing Volume was 2 to 1. This is yet another bullish scenario. This calculation is shown next:

(3/1)/(2/1) = 1.5

A reading of 1.5 is extremely bearish, yet Advancing Issues outpaced Declining Issues by 3 to 1 and Advancing Volume outpaced Declining Volume by a ratio of 2 to 1; very bullish inputs.

By reversing the previous scenario and making Advancing Issues stronger by a ratio of 2 to 1 and Advancing Volume stronger by a ratio of 3 to 1, the status quo interpretation of the Arms Index is found.

(2/1)/(3/1) = 0.67

The result, 0.67, is a strong bullish reading confirming this calculation's bullish inputs of 2 to 1 Advancing Issues and 3 to 1 Advancing Volume.

What Does This All Mean?

The Arms Index emphasizes volume. In the first example, there was twice as many Advancing Issues and twice as much Advancing Volume. Therefore, 67% (2 to 1 is equal to a 67% and 33% split) of all NYSE issues were advancing, and subsequently 67% of all NYSE volume was with Advancing Issues. For the Arms Index to give a bullish reading, the Arms Index would expect there to be more volume poured into the advancing stocks, such as in the last example where 75% (3 to 1 is 75%) of all NYSE volume was in 

Advancing Issues.

Nevertheless, a person could legitimately question why 67% of all NYSE issues being gainers and 67% of all volume being with winning issues could be considered neutral.

Arms Index Alternatives

Separating the two components of the Arms Index is a viable alternative.
  • (Advancing Issues / Declining Issues) is called the Advance/Decline Ratio
  • (Advancing Volume / Declining Volume) is called the Upside/Downside Ratio.
Another alternative to look into is creating an average volume per issue; this is shown below:
  • (Advancing Volume / Advancing Issues) / (Declining Volume / Declining Issues)
This version is more intuitive; it would be bullish above one because there would be more average volume per up issue and the indicator would be bearish below one because there would be higher average down volume per issue. The same type of problems could arise as those with the Arms Index. In this case, very few issues could be gainers, but the stocks that were gainers could have high amounts of volume. Thus the top half of the equation would be greater than the bottom half, returning a bullish signal, even though very few stocks advanced that day.

Probably the best alternative to the Arms Index is the market thrust indicator (see: Market Thrust); its formula is as follows:
  • (Advancing Issues x Advancing Volume) - (Declining Issues x Declining Volume)
With the market thrust indicator, the more advancing issues, the larger the market thrust value. Similarly, the more advancing volume, the larger the market thrust value.

Of course, by using math and an imagination, a trader could come up with various other combinations.

Moral of the story: It is important to be a knowledgeable trader and know what the strengths and weaknesses of each technical indicator is; also, don't rely on just one indicator.

Advance Decline Line

The Advance Decline Line is used primarily to confirm price movement and detect divergences. The calculation of the Advance Decline Line is quite simple:

New York Stock Exchange (NYSE) Advancing Issues - NYSE Declining Issues

The calculated number is then added to the previous day's Advance Decline Line. To illustrate, say that todays advancing issues ($ADV or $NYADV) is 1,692 stocks. That is 1,692 stocks closed the day with an increase in their share price. The declining issues ($DECL or $NYDEC) is 1,311. At the NYSE, 1,311 closed the day with a decrease in their share price.

1,692 - 1,311 = +381

For the day, 381 more stocks closed the day higher than closed the day lower. This is a bullish sign. To continue the example, yesterday's Advance Decline Line totaled 45,874. Today's reading of +381 would be added to the total of yesterday. This would result in an updated total of 46,255.

Whether the total is positive or negative is irrelavent; what is relavent is the direction or the trend of the Advance Decline Line. An increasing Advance Decline Line is bullish because more stocks at the NYSE are closing the day with gains; whereas a decreasing Advance Decline Line is bearish because more stocks are closing the day with losses.

The Advance Decline Line is a powerful confirmation tool and divergence warning tool. The chart of the mini-Dow future contract of the Dow Jones Industrial Average or Dow 30 represents these confirmation and divergence signals:


High #1 to High #2

The mini-Dow future contract made a higher high at High #2; however, the Advance Decline Line failed to make a newer high, in fact it made a lower low. At High #2, less stocks were participating in the rally; thus, there was less strength behind the rally in the Dow Jones Industrial Average. This failure of the Advance Decline Line signaled a strong bearish divergence.

High #2 to High #3

This is an example of the Advance Decline Line confirming the trend in price of the mini-Dow future. The mini-Dow future made lower highs and likewise, the Advance Decline Ratio made lower highs.

Low #1 to Low #2

Yet another bearish divergence occured from Low #1 to Low #2. The mini-Dow futures contract made a higher low, an acknowledged bullish sign. However, the Advance Decline Line did not confirm the mini-Dow future's ascent. In fact, during the entire rally of the mini-Dow from Low #1 to Low #2, the Advance Decline Line was making lower lows. This bearish divergence signaled that stock investors and index futures traders should be wary of the recent increases; the market as a whole is not behind the recent move higher.

In conclusion, the Advance Decline Line is a very effective tool to confirm price action in stocks and stock indexes as well as signaling potential reversals or weak price moves. Another similar indicator is the Arms Index [TRIN], (see: Arms Index).

Average Directional Index (ADX)

The Average Directional Movement Index (ADX) technical analysis indicator describes when a market is trending or not trending. When combined with the DMI+ plus and DMI- minus (see: DMI) the ADX can generate buy and sell signals.

However, the main purpose of the ADX is to determine whether a stock, future, or currency pair is trending or is in a trading range. Determining which mode a market is in is helpful because it can guide a trader to which other technical analysis indicators to use.

The chart of the E-mini Russell 2000 Index Futures contract below shows an excellent example of the ADX in action:


ADX Shows Trend Strength

The first concept to remember is that the direction that the ADX moves doesn't depend upon the direction of the underlying stock. All the ADX shows is the trend strength.
  1. Strong upward trend of stock = Increasing ADX
  2. Strong downward trend = Increasing ADX
As can be referenced from the chart of the E-mini Russell 2000 Index Futures contract above, when the e-mini future was rising in a strong upward trend, the ADX indicator was rising.

When the e-mini futures contract moved into a non-directional consolidation phase, the ADX decreased.

ADX is a Great Complement to Other Technical Indicators

The ADX is so popular because determining whether a stock, commodity, or currency market is trending or not trending can help a trader avoid the pitfalls of some indicators.

Moving Averages

Moving averages and their variants are effective during trending markets; however, during consolidation periods when prices go up and down, but in no direction, moving average indicators have a tendency to give numerous false buy and sell signals that add up to trading losses. During trending markets, use moving averages, trendlines, and other trend following technical indicators.

Oscillators

Oscillators are extremely effective in non-trending markets. Buying low and selling high is accomplished quite readily with oscillators. Unfortunately, during trending markets, oscillators perform quite poorly, often selling short during a bull market run or buying during a bear market downtrend, adding up to large losses. For periods of non-trending, use oscillators like Stochastic Fast & Slow, RSI, or Williams %R and other range-bound indicators like Bollinger Bands or Moving Average Envelopes.

The importance of the 20-level and 40-level, along with more examples of the ADX in action, is covered on the next page.

Interpreting the ADX

It is important to re-emphasize that the direction of price doesn't affect the ADX; it is the strength of the stock, futures, or currency's trend that matters.

Below, we see the E-mini Russell 2000 Futures contract, but here the e-mini future is in a downtrend, a strong downtrend. Note that the ADX is rising even though the price of the e-mini future is falling.


Interpreting the ADX
  • Below 20: Non-trending market.
  • Crosses above 20: Signal that a trend might be emerging; consider initiating buy or sell short in direction of prevailing stock, future, or currency price movement.
  • Between 20 & 40: If ADX is increasing between 20 and 40, then it is further confirmation of emerging trend. Buy or shortsell in the direction of the current market direction. Avoid using oscillator technical indicators and use trend following indicators like moving averages.
  • Above 40: Very strong trend.
  • Crosses above 50: Extremely strong trend.
  • Crosses above 70: "Power Trend"; very rare occurence
In his book, New Concepts in Technical Trading Concepts, Welles Wilder, Jr., the creator of the ADX also created the DMI+ and DMI- indicators to generate buy and sell signals specifically for the ADX technical analysis indicator. In fact the ADX is derived from the DMI+ and DMI- calculations (see: DMI).

The most recent information on the ADX indicator is chronicled in the book ADXcellence by Dr. Charles B. Schaap. More information can be found at ADXcellence.com.