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Degree to which the stock or commodity is overbought or oversold

In the first article of this series we introduced the Midas chart as a new way of displaying historical price and volume data.   Containing three essenial elements: daily (average) price, a theoretical support level, and on balance volume - all plotted vs.   cumulative volume rather than time - the Midas chart provides a hitherto unavailable framework for categorizing and in many   cases understanding the dynamics of price behavior.

Specifically, in this approach, it is the price relative to the theoretical support curve that determines the degree to which the stock   or commodity is overbought or oversold. This is in contrast to the more familiar methods of technical analysis which focus instead   on price relative to moving averages, linear trendlines and/or previous tops and bottoms. The on balance volume in turn provides a measure of the "strength" of the support curve, i.e. whether it will hold or be penetrated.

In this and future articles, we will develop these concepts by studying specific examples in detail. So let's turn first to the Midas   chart for Stone Container below. Note first how well the theoretical "primary" support level curve predicted the actual trend   reversal points. (Traditional technical analysis would have anticipated that the pullback from the peak at around 21 would be   stopped at about 17 – the previous peak).

Next note how the movement of the on balance volume to new high ground correlates with the subsequent move to new highs in   the price. This is in contrast to the second example below, Airtouch Communications, where the marked declining trend of obv   correlates with the subsequent penetration of the theoretical support level. In the absence of the obv data, one might have expected   the support level to "hold" and give rise to a new upward price leg since up to that point it had indeed provided support just as in   Stone Container.

Returning to Stone Container, note finally that we have introduced a new feature of the Midas method: the concept of a hierarchy   of support levels. We thus speak in terms of a "primary" support and a "secondary" support. (While we have yet to present the   equations for these theoretical curves, for now we can say that both the primary and secondary support curves are generated by the   same algorithm.) Indeed, in articles to follow we will show examples of strongly trending stocks for which one can clearly   distinguish primary, secondary, tertiary and even fourth order support levels.

To introduce some Midasspeak, a Midas theorist would describe Stone Container thusly: "STO is in a primary bull move, with a   thrice validated primary support level. It has currently pulled back to and is pausing at a doubly validated secondary support. No   deterioration in the upward trend of obv is yet evident, so the expectation is that the secondary will hold and the price will resume   its upward motion. If the secondary fails to hold, the price would be expected to decline at least to the primary support level at   about 17." Even though we have only looked at three Midas charts in this and the previous article, there should already be a   change in the way we look at a conventional price vs time bar chart. One should focus on the trend reversal points and see whether   one can visualize a series of support curves to which they might correspond. To facilitate this visualization, in the article to follow   we will transform Midas charts from the cumulative volume to the time domain. In addition, since these three examples are all in   contemporary real time, we will revisit them later to see how useful the Midas framework has been in characterizing their   subsequent behavior.