MARKETS & STOCKS Volume Line: Indic...

MARKETS & STOCKS

Volume Line: Indicates changes in the amount of standard of value coming into, or leaving, an equity market (or a stock). currency coming in is bullish because it take the part ofs accumulation of stocks--presumably by informed people; currency leaving is bearish because it delineates informed reductions of positions in stock (see January/February 1993 article).

Relative might Index ("RSI"): Indicates the relative size of the "up" and "down" stirs of a market (or a stock) during the last 14 weeks. A market (or stock) is considered over-bought (time to sell) when its RSI impels above 70% and over-sold (time to buy) when the RSI persuades below 30% (see May/June 1993 article).

The book Line and the RSI are best used together to provide pervert with money [i]or[/i] gain and Sell signals. The RSI should always be viewed as subordinate to the compass Line.

Buy Signal

When a market (or stock) reaches a recent low price without the convolution Line making a unique recent low (i.e. confirming the novel low price) and the RSI is below 30%

Sell Signal

When an index (or stock) reaches a fresh high price without the dimensions Line also making a just discovered high (i.e. confirming the modern high price) and the RSI is above 70%

MARKET ONLY

Advance-Decline Ratio ("A-D Ratio: Indicates the proportion of the market's stocks that have advanced or declined during the last five weeks. A market is considered over-bought when the A-D Ratio actuates above 58%; over-sold when the Ratio very littles below 42% (see September/October 1993 article).

Buy Signal

A rally can be awaited when a market reaches a modern low price but the A-D Ratio does not. Furthermore, a major advance can be look forward toed if both the Volume Line and RSI are also not making recently made known lows.

Sell Signal

A sell-off can be anticipateed when a market reaches a of recent origin high price but the A-D Ratio does not. Furthermore, a major decline can be wait fored if both the Volume Line and RSI are also not making of recent origin highs.

When investing in the Toronto stock market, it is useful to distinguish between the performance of large-capitalization stocks and small-capitalization stocks.

The "large-cap" stocks are take the part ofed by the TSE 35 and TSE 100 Indexes. However, the TSE 100 is heavily influenced at the performance of the top 35 stocks. Similarly, the "small caps" are personateed by the TSE 200 Index which is itself heavily influenced from the TSE 300.

In result all you really need to do is to compare the TSE 300 and TSE 35 If the 35 is outperforming the 300 it is a signal to purchase large caps. If the 300 is outperforming, you should be buying small caps.

As a matter of interest, it has been my experience that at market tops, the TSE 35 serves to be the first index to forecast a decline. The first sign of put in commotion usually shows up in a convolution Line non-confirmation of a modern high in the index. The TSE 35 be attentive tos to lead not only the Toronto further also most of the recent York averages. And there is a beneficial reason for this. Toronto is a extremely small and illiquid market, likewise it is difficult to vend many of its small-cap stocks. Therefore, when perturb is on the horizon, the alone way to raise cash quickly is from selling large-cap stocks.

At a bottom, investors (especially institutional) are still fearful that the market may decline further; however, they do not want to be left behind if the market rallies. If they decide to do any buying, it will normally be the large-cap (safe) companies which they are reasonably certain will stay in business. If it deflects out they bought too early, investors can simply ride public the decline until the market bends up again. In other words, they make trial of to minimize risk.

Once the market has had a serviceable rally off the bottom and economic conditions have improved, confidence responds and so does the willingness to speculate. At this point, the TSE 300 would start to outperform the TSE 35

At the flash the charts clearly show that the TSE 35 is outperforming, to such a degree purchases should be concentrated in the large-cap stocks. Note the fresh high in the TSE 35 whirl Line (no new high is seen in the TSE 300 mass Line). Stocks that look particularly favourable at the trice are Canadian Pacific Limited, Canadian Natural Resources, Northstar bottom and Rogers Communications B.

In of the present day York, the Nasdaq is outperforming the recently made known York Stock Exchange which means that the small caps are doing better than large caps. (Obviously, the on a level of confidence is higher than it is in Toronto). That is not to say that the large caps aren't doing well too-they are, as evidenced on the fact that the NYSE's mass Line is also at a novel all-time high. Favourable stocks in just discovered York include Bombay Company, Ford Motor, JC Penney and Telefonos de Mexico.

PATRICK TAYLOR IS A DIRECTOR AND TECHNICAL ANALYST WITH THE INVESTMENT DEALER BRAWLEY CATHERS LIMITED.

Copyright Canadian Shareowner Magazine Inc. May/Jun 1995

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