| Second Opinion® Weekly - Quick Start | Technical Terms Explained |
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In Quick Start, our goals are to:
Let's get started ! What is Second Opinion Weekly? Second Opinion Weekly is a quantitative model designed to help you manage market risk. Whereas analyst reports are intended to manage fundamental risk by supplying information on "fundamentals" such as sales, earnings, and industry outlooks, quantitative or "technical" analysis measures market risk--how investors and traders are actually trading. (Think about it: If you like a company and no one else does, it's unlikely that you'll make any money. If you like a company and others do as well, it's more likely that you'll make money. Second Opinion Weekly tells you what the others are thinking by measuring what they are doing with their money.) Second Opinion Weekly generates Buy-Hold-Sell opinions on nearly 5,000 stocks representing over 90% of the daily volume on the NYSE, NYSE American and NASDAQ markets. (Additional stocks are added each month. See the FAQs for the procedure.) Second Opinion Weekly will enable you to position stocks in the early stages of up moves and get out of stocks prior to a plunge. Let's first take a look at what is contained in the six sections of each Second Opinion Weekly. Afterwards, we'll look at what to key on when making your own individual Buy-Hold-Sell decisions, including the four warning signs that Second Opinion Weekly flashes for every stock.
Stops are area of significant recent support or resistance. The break below a Sell Stop or above a Buy Stop is an extremely important change in the technical condition of a stock and typically represents the beginning of the end of a previous trend. Stops are typically far away from the current price when a stock is clearly in an established trend. The stop will tighten closer to the current price when the stock's trend begins to change. For example, in early 1998, the sell stop for RAIN was near 23. The stock was experiencing significant selling. A few weeks later, the stock fell to 11 as the reason for the selling came out: disappointing earnings. Conversely, at the same time the buy stop on DEC was near 40. The stock was experiencing significant buying. At 45, the company announced it had received a $56 take-over offer. The breaking of a stop is one of the four warning signs that a high probability exists that a stock's trend is changing. However, since it is one of four signs used to confirm a change in a stock's technical outlook, the opinion will not change even though the stop is broken. Advanced technicians will want to note support (a price at which the stock is expected to hold), resistance ( a price at which the stock has difficulty breaking through). Support and Resistance are calculated using 3 seperate trend lines( for each) and extending the trend line to the current date. The closest trend line is used as the support or resistance number. As the stock moves through the trend line the next trend is then used. When all the trend lines have been violated, the value goes to N/A(Not Available). The Moving Average Box provides you with details on four of the most popular moving averages. Included in the data is the current value of the moving average, the percentage of the current price represented by the moving average value, and the slope of the curve. This box can be very usefull in identifing stocks which are very extended up or down.
Advanced technicians will want to note a stock's trading volume vs. it's trailing one month average daily volume and monthly percentage change.
Day traders or "scalpers", those with an extremely short-term perspective, will want to note the stochastics (Slow %K and Fast %K). These give one day and three day overbought/oversold signals. Advanced technicians will want to note the Bollinger Band® and Wilder's RSI readings and MACDs.
How do I use Second Opinion Weekly?
There are two key elements to Second Opinion Weekly. The first is the OPINION which we have already covered. The second is the SCORE. Together they produce the Recommendation which is the best way to manage your stock investments.
The Score reduces the level
of market risk to a single number for interpretation purposes. Scores range
from 0 to -4 for Longs, attempting to show levels of technical deterioration
and guiding you to an exit point. Scores range form 0 to +4 for Avoids,
attempting to show levels of improvement and guiding you to an entry point.
The table below summarizes the Score System.
Our relationships with institutions and our experience over the years have provided some reliable, tested criteria in making Buy-Hold-Sell decisions with a high degree of confidence. A "Long" that flashes one or more of the following four warning signs is in trouble. At this point, you should be monitoring the stock closely and considering defensive strategies:
For advanced technicians and short sellers, the same warning signs apply to Avoids:
Can Market Edge improve my investing results? The following back tested results used the Score to trade the stocks that are incorporated in the S&P 100 Index (OEX) over a 5 year period from 8/6/90 to 5/16/95. Four tests were performed for the Long side. Long positions were opened when a stock was Upgraded to Long by SECOND OPINION. Positions were closed when the Score reached -1, -2, -3, and -4. The results are listed below.
ANNUALIZED % TIME
STRATEGY % RETURN INVESTED
Buy on Upgrade to Long 9.5% 38.5%
Sell when Score is -1
Buy on Upgrade to Long 15.2% 46.2%
Sell when Score is -2
Buy on Upgrade to Long 23.0% 53.9%
Sell when Score is -3
Buy on Upgrade to Long 25.1% 56.5%
Sell when Score is -4
S&P 100 9.6% 100.0%
The annualized percent return is the average
annual return computed from the total profits and total capital required
for the life of the test. The average annualized % return is calculated
by taking the dollar amount of the largest transaction less any profits
from prior transactions divided by the number of years in the test for
each stock in the test. The percent time invested represents the time spent
in open positions.
Notice that the results are much better if the position is held until the Score reaches -3 or -4. Not only does the annualized percent return increase, but the time invested increases also. When the Score reaches the lower values a greater degree of deterioration occurs before the position is exited. Of particular importance in this analysis is the % time invested. For example, opening positions when the Opinion was Upgraded to Long and closing when the Score reached -3 generated a 23.0% average annualized return while being invested only 53.9% of the time. Being fully invested in the S&P 100 Index during the same period would have generated a 9.6% annualized return. A more aggressive approach when initiating positions can be accomplished by entering into positions using the Early Entry Long in the Personal Stock Watch module. Create a list of stocks that you want to monitor and then access Early Entry Long to access those stocks which meet the Early Entry criteria. The results of trading the same list of stocks over the same time period follows.
ANNUALIZED % TIME
STRATEGY % RETURN INVESTED
Buy on Early Entry Long 13.4% 46.7%
Sell when Score is -1
Buy on Early Entry Long 23.0% 55.7%
Sell when Score is -2
Buy on Early Entry Long 31.5% 64.3%
Sell when Score is -3
Buy on Early Entry Long 33.4% 66.5%
Sell when Score is -4
Once again you will notice that the lower
the Score gets before exiting the position, the better the results.
As you can see, during this test Second Opinion Daily outperformed the S&P 100 by over 2.5 to 1. Of course, past results are no guarantee of future performance. Summary First and foremost, it pays to remember that nothing works ALL of the time and there is no such thing as a magic "Black Box". If you want Second Opinion Weekly to fulfill this fantasy, you will be disappointed. However, technical research can help you manage market risk, as opposed to fundamental risk, by measuring what people are thinking and by identifying what they are doing. This is the basis for the old adage "The Trend is your Friend". Adherence to the technical conditions enables you to position yourself in stocks in the early stages of up moves and alerts you to get out of stocks prior to significant declines. Market Edge is a leader in providing technical research in a form the individual trader or investor can easily use and understand. Market Edge identifies conditions that have a high probability of predicting bullish or bearish price movement. By focusing on the few items highlighted in our discussion of the six components of the Second Opinion report and familiarizing yourself with the Scores and four warning signs, YOU provide yourself with powerful and reliable input that assists in making those difficult Buy-Hold-Sell decisions. |
| Second Opinion® Weekly - Technical Terms | Quick Start |
| Market Edge Help - Predefined Strategies |
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Upgrades Stocks whose Opinion was upgraded from either AVOID to NEUTRAL or from NEUTRAL to LONG this week. |
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Downgrades Stocks whose Opinion was downgraded from either LONG to NEUTRAL or from NEUTRAL to AVOID this week. |
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Momentum Longs Stocks regarded as Momentum Longs are stocks whose Opinion has been recently upgraded to LONG and are coming off a significant bottom with momentum or stocks that have experienced a significant upward move, the momentum characteristics are still in place and the stock has experienced a minor pullback. To satisfy the first condition, the stock's Opinion is LONG, the C-RATE (Confidence Rating) is between +4 & +15, ADXR is greater than 20 (denoting a strong trend is in place), the average volume is greater than 50,000 shares per day, the stock is not in an Overbought condition, and the closing price is 5% - 12% above the Stop. To qualify for the second scenario, all of the above conditions must be met with the exception that the C-RATE is less than +4 and the closing price is 10% - 20% above the Stop. |
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Momentum Shorts Stocks rated as Momentum Short (Sale) candidates are stocks whose Opinion has been recently downgraded to AVOID and have formed significant top formations with distribution characteristics or stocks that have experienced a significant downward move, the momentum characteristics are still in place and the stock has experienced a minor retracement. To satisfy the first condition, the stock's Opinion is AVOID, the C-RATE (Confidence Rating) is between -4 & -10, ADXR is greater than 20 (denoting a strong trend is in place), the average volume is greater than 50,000 shares per day, the stock is not in an Oversold condition, and the closing price is 5% - 12% below the Stop. To qualify for the second scenario, all of the above conditions must be met with the exception that the C-RATE is greater than -4 and the closing price is 10% - 20% below the Stop. |
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Improving Stocks which are rated "Avoid" or "Neutral From Avoid" but have shown improving technical condition. In Market Edge / Second Opinion, improving technical condition is identified by a Score from +1 to +4. Stocks with a higher score have greater technical improvement. |
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Deteriorating Stocks which are rated "Long" or "Neutral From Long" but have shown deteriorating technical condition. In Market Edge / Second Opinion, deteriorating technical condition is identified by a Score from -1 to -4. Stocks with a lower score have greater technical deterioration. |
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Score Score is a value between -4 and +4 and indicates whether the technical condition of the stock is improving or deteriorating. A score of -4 represents the worst extreme possible before the stock is Downgraded to Avoid while a score of +4 indicates the best level obtainable before the stock is Upgraded to a Long Opinion. It is suggested that you take defensive action if you are long a stock and the Score deteriorates to -3 or -4. Conversely, if you short a stock take defensive action if the Score is +3 or +4. |
| Market Edge Help - On The Edge |
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Market Edge monthly market analysis and forecast, On The Edge, consists of three proprietary market timing models: the Cyclical trend Index (CTI), the Sentiment Index and the Momentum Index. The collective readings from these indices are incorporated into a Market Timing Model that is referred to as the Market Posture. Based on the status of the indices, the Market Posture is regarded as either Very Bullish, Mildly Bullish, Very Bearish, Mildly Bearish or Neutral. The model is updated on a weekly basis. Typically, the model will reverse its posture 2-3 times per year. By staying on the right side of the market, you will be long stocks when conditions are favorable and out of the market during times of uncertainty. The various components that are incorporated into each of the market timing indexes and Market Posture are described in the following sections:
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| Market Edge Help - On The Edge - Cyclical Trend Index (CTI) | |||||||||||||||||||||||||||||||||||||||
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The Cyclical Trend Index (CTI) is the cornerstone of the Market Edge timing model. It is based on a technical application known as "Cyclical Analysis". The underlying premise of "Cyclical Analysis" is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves, a basic cycle which determines much of the motion in the universe.
The utilization of sine waves in market forecasting is based on studies that demonstrate that stocks, and in particular the DJIA, tend to experience price reversals at anticipated time intervals. These intervals, referred to as cycles, consist of the price movement of the DJIA from a significant LOW to an identifiable HIGH, followed by a retreat to a recognizable LOW. "Cyclical Analysis" systematically determines the beginning and ending points of these various cycles enabling the user to accurately time purchases and sales for maximum profit. The Cyclical Trend Index has a twenty-one year history during which time it has accurately forecasted the market's direction with eighty percent accuracy. Actual and Projected readings of the Cyclical Status of the market are calculated on a weekly basis. Plus 1 to +17 are Bullish Readings while 0 to - 17 are Bearish. To picture how these cycles influence price direction, visualize the stock market as a piece of elastic that is constantly subjected to positive or negative forces that exert pressure in the same or opposite directions. These forces are the five cycles that are incorporated in the CTI. The following table classifies each CYCLE by it's average time duration:
Ideally, each cycle exerts upward pressure at the beginning of its time frame and continues to do so until it is one-half completed. At this point, the process is reversed resulting in negative pressures being applied to the market. When dealing with five cycles, the picture can become confusing. Two cycles may be in an UP posture, while one may be FLAT, and the remaining two may be pointing DOWN. In order to have a collective Positive or Negative picture of the state of the market, each cycle must be evaluated in such a way as to total their independent, positive or negative forces. This is done by assigning each cycle either a positive or negative numerical value based upon the amount of time that has elapsed since it's previous bottom. The sum of these + or - values is called the "CYCLICAL TREND INDEX" (CTI). This indicator reduces the cyclical status of the market to an absolute, numerical value and is a powerful tool in determining the future direction of the market. CTI readings of +1 to +21 indicate a "Bullish" trend in the market, whereas a 0 to -21 value signals a downward, "Bearish" scenario. The major problem that can arise when employing "Cyclical Analysis" in forecasting the market is the determination of starting points for the various cycles. Errors in assigning an accurate count can lead to aborted readings and adverse results. This problem can occur when identifying a cycle's low and is most pronounced when more than one of the cycles are due to make a bottom. In order to rectify this problem, both a Momentum Index and a Sentiment Index have been developed and are used in conjunction with the Cyclical Trend Index to refine the Market Timing Model. | |||||||||||||||||||||||||||||||||||||||
| Market Edge Help - On The Edge - Momentum Index | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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The Momentum Index is designed to measure market divergence by comparing the performance of eight, non-Dow Jones Industrial Average Indices to that of the Dow Jones Industrial Average. Divergence is a technician's term that measures whether the DJIA is performing better or worse than the majority of the other market indices. Whenever the DJIA goes its own way for a period of time, whether up or down, a market turn is usually at hand. Typically, negative divergence (DJIA is up while broader indices are trending down) exists at significant market tops, while positive divergence (DJIA is down while broader indices are trending up) occurs at major market bottoms.
Included in the Index are four additional indicators that measure the market's positive or negative BREADTH & MOMENTUM. A explanation of these indicators follows.
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| Market Edge Help - On The Edge - Sentiment Index | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Measuring the market's Bullish or Bearish sentiment is important when attempting to determine the market's future direction. Market Edge tracks nine technical indicators that measure excessive speculative or sentiment conditions prevalent in the market.
Sentiment based technical indicators are:
Each indicator is assigned a positive, negative or zero value depending on whether its reading is deemed to be Bullish, Bearish or Neutral . The sum of these values is referred to as the Sentiment Index. Plus 3 to plus 11 readings are Bullish, while minus 1 to minus 11 readings are Bearish. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Market Edge Help - On The Edge - Market Posture | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Market Edge incorporates the readings from the CTI, the Sentiment and Momentum Index, into a Market Timing Model that is called the Market Posture. Based on the status of the indices, the Market Posture is regarded as either Very Bullish, Mildly Bullish, Very Bearish, Mildly Bearish or Neutral.
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| About Market Edge |
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Market Edge is a unique suite of investment tools developed by Computrade Systems, Inc. The purpose of our service is to provide quality, independent research in a manner that is both easily understandable and immediately actionable for individual investors as well as professional money managers. Everything you will need to succeed in the markets can be found in Market Edge. Market Edge features Second OpinionŽ, a comprehensive computer-generated technical evaluation of more than 4,500 stocks, along with fundamental research and commentary from Standard & Poor's. Market Edge will generate daily investment ideas for every type of trading strategy thereby enabling one to trade and invest with a consistent, disciplined approach in all market environments. |
