Good day,
This article is a continuation of the previous entry of the blog...
----------8< (Cut and paste from Wikipediaon Dow Theory >8------------
The Dow Theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation.
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As one can see from the above statement that the idea of Sector Rotation had been officially around for at least a century, but, if one were to flip through the whole library of Technical Analysis books in the library, he may not find more than 3% of the books mention about it(been there, done that). And, even if one can find such topic in the book, most of them merely touching the surface by introducing that there is such thing around.
Personally, I think that the traditional way of analyzing the price chart is hard to VISUALIZE how these rotation take place. Here is to introduce a tool that could facilitate the user to visualize and understand how the Rotational of the stocks/sectors are taking place in the market. Thanks for the exponential grow of personal computer's speed over the years and these CPU intensive tasks can be handled with ease nowadays. :-)
(1) Transformation of Traditional Chart into a X-Y Cartesian Plane.
Figure 1: Transformation of Traditional Chart into a X-Y Cartesian Plane.
Figure 1 shows how a normal chart can be transformed into The Galaxy Chart in showing the Relative Momentum and Trend of multiple stocks. Though the human eyes can ONLY see the 2-dimensional chart, it is up to the programmers' IMAGINATION to incorporate N-dimensional information into it. For instance, add a filter to get rid of those stocks that are moving side way.
(2) Understanding the meaning of The Galaxy Chart
Figure 2. The Galaxy Chart
Figure 2 shows a typical Galaxy Chart. Every stock is represented with a comet-like diagram with multiple dots in its tail. The POSITION of the biggest dot in the comet represent the last bar's RELATIVE STRENGTH of the momentum and trend with respect to others stock in a same watch list. The length of the comet tail can be set by the user, and each additional dot appears on the tail mean an additional look-back period. Therefore, the DIRECTION and LENGTH between the dots show the change of strength in Momentum and Trend dynamically over time. So, it provides more information than a normal static list of stock scan from explorer as it shows the dynamic trail.
Figure 3. Zooming-in to the Upper Right Corner where both Momentum and Trend are both Postive.
Figure 4. Statiscal and Probability wise...
.
Figure 4 is to illustrate how to focus on the fastest moving stocks visually. Note that there is a criss- cross with grid lines in the center of the chart, which represent the (0,0) origin position of the X-Y co-ordinate. The upper half of the chart represent the +ve momentum and lower half of the chart represent -ve momentum. While the right hand side of the chart represent the +ve trend, and the left hand side represent the -ve trend.
Therefore, the top right corner of the chart can only be populated with stocks that are both +ve in momentum and trend. The further away from the center are the faster the runner, and they are not range-bound. While the bottom left corner is just exactly opposite. (Note that the distribution chart in the figure is for illustration purpose ONLY, it does not mean that the stocks in the market have normal distribution in +/- profits over time.)
Video 1. Play back of Rotational Movement
The above video shows the SPY and its 9 sector ETFs on how Rotation in the sectors take place over time.
(3) Set up
Figure 5. An example on dual monitors intra-day set up
.jpg)
This article is a continuation of the previous entry of the blog...
----------8< (Cut and paste from Wikipediaon Dow Theory >8------------
The Dow Theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation.
------------------------------------------- 8<--------------------------------------------
As one can see from the above statement that the idea of Sector Rotation had been officially around for at least a century, but, if one were to flip through the whole library of Technical Analysis books in the library, he may not find more than 3% of the books mention about it(been there, done that). And, even if one can find such topic in the book, most of them merely touching the surface by introducing that there is such thing around.
Personally, I think that the traditional way of analyzing the price chart is hard to VISUALIZE how these rotation take place. Here is to introduce a tool that could facilitate the user to visualize and understand how the Rotational of the stocks/sectors are taking place in the market. Thanks for the exponential grow of personal computer's speed over the years and these CPU intensive tasks can be handled with ease nowadays. :-)
(1) Transformation of Traditional Chart into a X-Y Cartesian Plane.
Figure 1: Transformation of Traditional Chart into a X-Y Cartesian Plane.
(2) Understanding the meaning of The Galaxy Chart
Figure 2. The Galaxy Chart
Figure 2 shows a typical Galaxy Chart. Every stock is represented with a comet-like diagram with multiple dots in its tail. The POSITION of the biggest dot in the comet represent the last bar's RELATIVE STRENGTH of the momentum and trend with respect to others stock in a same watch list. The length of the comet tail can be set by the user, and each additional dot appears on the tail mean an additional look-back period. Therefore, the DIRECTION and LENGTH between the dots show the change of strength in Momentum and Trend dynamically over time. So, it provides more information than a normal static list of stock scan from explorer as it shows the dynamic trail.
Figure 3. Zooming-in to the Upper Right Corner where both Momentum and Trend are both Postive.
Figure 4. Statiscal and Probability wise...
.
Figure 4 is to illustrate how to focus on the fastest moving stocks visually. Note that there is a criss- cross with grid lines in the center of the chart, which represent the (0,0) origin position of the X-Y co-ordinate. The upper half of the chart represent the +ve momentum and lower half of the chart represent -ve momentum. While the right hand side of the chart represent the +ve trend, and the left hand side represent the -ve trend.
Therefore, the top right corner of the chart can only be populated with stocks that are both +ve in momentum and trend. The further away from the center are the faster the runner, and they are not range-bound. While the bottom left corner is just exactly opposite. (Note that the distribution chart in the figure is for illustration purpose ONLY, it does not mean that the stocks in the market have normal distribution in +/- profits over time.)
Video 1. Play back of Rotational Movement
The above video shows the SPY and its 9 sector ETFs on how Rotation in the sectors take place over time.
(3) Set up
Figure 5. An example on dual monitors intra-day set up
.jpg)
This is user preference...
It can be in various time frame. Start from Intra-day to Monthly.
(4) Caution!
Although any programmer with graphic programming experience can build up this platform within a week or so...
And:
(a) Knowing to use the right alogrithms to feed in the X-Y co-ordinate is the key. GIGO(garbage in garbage out)!
(b) The sector rotation concept is simply another form of Trend Trading. Therefore, it inherited a drawback from the Trend Trading Methodology. That is the deep drawndown during the change of trend, where the fastest stocks could fall the fastest and weakest stock rebound the fastest. Therefore, a very STRONG filtering technology MUST be built-in to the system to prevent such thing to happen during such period -> take the profits or cut losses quick. Such as Vibration Energy Filter or any equivalent... Then it can be considered as a complete system.
(5) Conclusion
The last few articles are shared not because the author/programmer, I AM, do not understand nor under estimate their value and shared them accidentally. Rather, they are shared because I strongly believe that when these concepts is fan out openly... it may be duplicated to a certain degree that could help the general public to equip themselves with a better understanding and tools to handle the market.
Just to side track with a small story that happened in my kid's science class not long ago...
The teacher in the class asked the students that "What If Thomas Edison did not invent the light bulb?" Then looking for the standard answer: "Oh! We are still having to light the candle at night!"
"NO! NO! NO!" I told her...
"If Thomas Edison did not invent the light bulb. Someone else would have invented it just slightly later. Or, if someone else did not invented the light bulb, daddy - me could have invented the light bulb. And, if I don't invented the light bulb, you may have the chance to invent the light bulb yourself!" Then I had to add, "Now you know the real answer, BUT, in the school test or exam, you MUST use your teacher's answer."
The morale of telling this story is that... If one don't share it, someone else down the road would share it anyway.
Happy reading.
KH Tang
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