V. 20:1 (12-14): Letters To S&C

V. 20:1 (12-14): Letters To S&C
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In “Balance Of Market Power” (S&C, August 2001), author Igor Livshin constructs an oscillator based on three types of rewards. But I think it lacks one more type of reward: today’s open minus yesterday’s close; that is, overnight action on digesting news by market participants. Without this, the oscillator may interpret the situation incorrectly.

Suppose the Nasdaq opened down with a gap of 100 points, then rallied from the open 50 points, and closed at the high of the day. Say the situation repeated five days in a row. Calculating the oscillator’s value based on the four intraday values (today’s open, high, low, close) will indicate a very bullish bias, when in reality the price was dropping like a stone.

ANNA MOZHAEVA, via e-mail Russia

Ivor Livshin replies:

This suggested addition to the BMP formula would cover the after-the-market- close activity (specifically, gaps). However, I personally would not include this part in the BMP calculation for the following reasons:

1 Gaps happen relatively seldom, and their impact on multiple days’ (say, 14 days) aggregate value of the BMP indicator is minimal. I can’t ever remember seeing five gaps in a row.

2 Very often, the overnight activity is wrong and has a short-lived impact on the market direction.

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