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stock price behavior

The tools have now been provided to analyze stock price behavior relative to the theoretical hierarchy of support/resistance (S/R)   levels. How to use these tools to improve one's trading performance –the "engineering" aspect of MIDAS- is the focus of the present article.

To paraphrase Hamlet, the basic question is "to bounce or not to bounce". Our theory predicts where a bounce (i.e. a trend   reversal) should occur, and if it does occur, where such a bounce should carry to as a minimum objective. But, since the market is   in the final analysis probabilistic rather than deterministic, our decision whether to trade an expected bounce - by buying at the   theoretical support and selling at a theoretical resistance - will require some ancillary assessment of the likelihood that the support level will in fact hold.

In the familiar and apt analogy between the stock market and the motion of a cork floating on the sea, one associates the broad   tidal motion with the influence of the overall market on a particular stock. Superimposed on the tide are individual waves which   are analagous to the effect of the group (i.e. computers, cyclicals, golds, etc.) to which the stock belongs. Finally there is the   microenvironment of ripples and wisps of wind which relate to the particular dynamics of the stock itself.

Relegating to a later article the important topic of the application of Midas methods to the overall market, we look to the other two   factors for the clues we seek. Specifically, we can examine Midas charts for two or more stocks in the same group on the   assumption that one of them will provide a leading indicator of the group's behavior. Also, for a single stock we can consider the   Midas techniques in concert with other tools from conventional technical analysis, seeking independent confirmation that a tradable bounce may be at hand.

To pursue the group angle, we consider two paper product stocks: Chesapeake Corp. and Stone Container. The Midas chart for   Stone Container updated to the time of this writing is shown in the first figure. The astute reader will recall that we visited STO   before (in article #2), at a time roughly corresponding to the tip of the arrowhead in the figure. To recall our exact words: "...the   expectation is that the secondary (i.e. S2) 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." In the event, the secondary did hold for some   time and then ultimately failed after which support was found precisely at S1. The subsequent bounce has carried to the   expected minimum objective, the resistance level R1, and at this moment is attempting to penetrate it.

Now look at the Midas chart for Chesapeake Corp.Now look at the Midas chart for Chesapeake Corp. As with STO, the S2   support was penetrated after holding for some time, and a bounce has started from the S1 level. It, however, has not yet carried as   far as R1 and in this regard is lagging behind STO. If STO in fact is subsequently able to convincingly penetrate its R1, then this   would give incentive to buy CSK since the implication is that the paper stocks have completed their correction and are about to start a new bull leg.

Turning now to the concept of synergistically combining Midas methods with other techniques of technical analysis, this gives us   an opportunity to redeem the promise made at the end of the previous article to show how Midas can be integrated into existing   commercially available charting software. Windows on Wall Street (tm), a product of Market Arts Inc., is one such package which   automates the importation of daily updates or historical stock data and allows the user to produce charts incorporating a variety   of standard tools of technical analysis. As with other similar products it also permits the introduction of user-defined curves (or   "custom indicators") to be plotted on the same graph as the price data. Unfortunately, however, in common with all such packages   (of which I'm aware) one is limited to plotting vs time rather than vs cumulative volume.

Nevertheless, it is quite simple to plot S/R levels using these packages. In the case of Windows on Wall Street, one merely defines the following "custom indicator":

CUM( .5*(H+L)*V*IF(CUM(1)>DAYS,1,0) ) / CUM( V*IF(CUM(1)>DAYS,1,0) )

where DAYS is a parameter equal to day (i.e. record) number at which the S/R level is to be launched. (Defining several such   indicators, labelled S/R#1, S/R#2, etc, permits as many S/R curves to be simiultaneously plotted as one wishes). A particularly   useful feature is that since DAYS is an adjustable parameter, one can readily shift the launch point around by simply clicking on   the S/R curve with the mouse, and then clicking on a parameter-change button.