Phase Change Index by M.H. Pee
Which phase is your market going through? Find out by using
Prices at any time can be up, down, or unchanged.
A period where market prices remain
relatively unchanged is referred to as a
consolidation. A period that witnesses relatively
higher prices is referred to as an uptrend,
while a period of relatively lower prices is
called a downtrend. The phase change index
(PCI) is an indicator designed specifically to
detect changes in market phases.
THEORY BEHIND THE PCI
Six phase changes are possible, as illustrated in Figures 1–6
(the black line represents the closing prices for a particular
period, in this case 35 days). Just how does the PCI differentiate
between the six? First, note that in order to trade the
market profitably, you will have to hold long positions during
uptrends, be short during downtrends, and be flat (or at least
remain with the previous position) during consolidations
until you are sure of the market direction. Hence, for the
scenarios in Figures 1 and 3, you would like to be long (they
signal what could be the beginning of an uptrend). For the
scenarios in Figures 2 and 4, you would prefer to be short, and
for the scenarios in Figures 5 and 6, you would be happy to
remain with your position.
So what is the difference between Figures 1 and 3, Figures
2 and 4, and Figures 5 and 6? To find out, draw an imaginary
gradient line connecting the starting and ending closing
prices for the selected period (see the red line in Figures 1–6).
For the scenarios in Figures 1 and 3, note that most of the
closes for the period remain below this line. In addition, the
gradient line slopes upward.
For Figures 2 and 4, most of the closes were above the
gradient line for the chosen period, and the gradient line
slopes downward. For Figure 5, most of the closes remain
above the gradient line (which is the same as Figures 2 and 4),
but its gradient line slopes up instead of down. Finally, Figure
6 shows the majority of the closes below the gradient line
(which resembles Figures 1 and 3), but it displays a downward-
sloping gradient line.