Stocks & Commodities V. 22:10 (22-27): A Tale Of Two Indicators by Andrew Tomlinson
What do you do when two apparently similar indicators give opposite signals?
On July 6, 2004, I was feeling pretty pleased with myself. The stock market was falling and my short positions were making money for the first time in a couple of months (hey, stay on one side of the market for long enough and you’re sure to be right sooner or later). One of my short positions, Micromuse (MUSE), gapped down 20% at the open on a revised outlook.
When I checked the market later in the day (I trade from
home, so the first day after a long weekend is an orgy of
grocery shopping and ferrying the kids here and there — you get the picture — so being glued to the broker’s screen is not really an option), I saw that the stock had traded down another 18% before starting to swing up again. No reason for swift action, I decided (my experience as a non–daytrader is that I lose money if I make snap judgment calls during the trading day). I chose to wait for my day’s-end review before planning
my next steps.
WHAT I FOUND
That evening, I opened up MetaStock and started to go
through my positions. When I got to MUSE, I saw that the price had ended up pretty much where it started, showing a big initial gap down and then a spike reversal (one of those falling-window-doji-hammery-things for candlestick aficionados) on heavy volume.
The surprise came when I looked at my volume indicators. I typically use Chaikin money flow† (CMF), using a nine-day period instead of the 21-day default since I like the greater sensitivity. But I’ve also recently been testing out a couple of other volume indicators, having just finished reading the book Bollinger On Bollinger Bands, which spends some time on the indicator’s use in confirming entry signals. So I also
had a 10-day money flow index (MFI) up on my screen.