Range Expansions & Contractions, Part 3 by Dirk Vandycke
Connecting The Dots
In this third and final part of a series that looks at expansions & contractions to gauge divergences, we look at how to apply the Chartmill bull indicator to trading.
I started this series of articles by explaining the difference between extrinsic and intrinsic divergence. I then discussed how extreme percentage days tend to close near their extremes in the direction of the move. Any divergence from this is rare. Since these kinds of divergences tend to cluster, I take a running sum of them. This forms the backbone of the Chartmill bull and bear indicators. Strong trend-ing days are measured relative to historical characteristics. The use of running percentiles instead of averages makes these indicators dynamic and adaptive, unlike other divergence indicators. In this final article of this series, I will discuss the usefulness and accuracy of the Chartmill bull and bear indicators using examples.
FIRST THINGS FIRST
In parts 1 and 2, you saw that, under normal circumstances, a weak close near the low of the day tends to accompany a weak day showing a relatively large price drop. Likewise, strong closes near the high of the day appear to be strongly correlated with strong days and bring along a relatively big price appreciation. Any repeated deviation from that pattern spells a top in the latter case or bottom in the former.