Secondary Indicators: Skipped so often

How many roll up their sleeves in a hurry, study the price chart of their favourite financial instrument, using the same old methods and time frame, all the time. When questioned, the usual retort is that this is their preferred method, that it works well for them, and further discussion is useless. What a pity!

Surely one of the most exciting and greatest pleasures in life is learning new things and approaching analysis with fresh eyes; with the wonder of a child.

Recently I have forced myself into looking more closely at secondary indicators. Yes, things like volume – when available – are staples for many. But what about then comparing the volume in the cash market with that in the related futures contract, and again with the volume in certain options, whether puts or calls are more active and which of the strike prices. Add this together and it tells you an awful lot about where the fault lines lie.Futures vol+OI

Open interest is available in the futures market and, while we all know that it must be a zero sum game in that there are exactly as many buyers as sellers, the absolute levels matter and can be compared over time. Is this an instrument in vogue? And if so are too many getting too involved with stubborn, stale positioning?

Implied volatility, and the skew between puts and calls, different strikes and maturities, and what these imply for directional trades is another great indicator. Again you can see which way investors feel things ought to move and is especially useful when combined with opinion poll results.

Data on levels of margin debt, and in which securities, is published by some bourses. In Shanghai at the moment according to Bloomberg Business the selloff has been ‘especially painful for margin traders as their favourite stocks sink faster than the benchmark index’. Why does that not surprise me?

Recent data from the Tokyo Stock Exchange shows that foreigners, who now make up a good portion of the market, are nevertheless betting against the index – at record levels. Data complied since 2008 – and remember that some stock exchanges prohibit all short selling (for being unpatriotic or whatever!) – saw the short-selling ratio on the Nikkei 225 at a record 38.3 per cent, and 35.8 on the TSE generally. With data like this no wonder brokers are warning that June ‘could see the start of disappointment’ according to the Financial Times.

TSE volume

Do please write in if you have suggestions for other secondary indicators I should be following.

 

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Posted in Finance, Markets, STA news, Technical Analysis, Trading, Trending
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2 comments on “Secondary Indicators: Skipped so often
  1. Laurence Halloran says:

    Thankyou for an interesting article, as an Option Trader and a keen Technical Analyst since I was 19yrs old , ( some time ago ) I have and still do use open interest to ascertain the possible direction of an underlying asset ,
    another secondary indicator I find useful is the Spread in the Option Price , usually I find the wider the spread the more likely the move in the underlying asset has been exhausted for the time being ,irrespective of how impressive the Technical picture may present at that time frame. I will wait and watch both the Spread and the technical picture for a more opportune entry point.

    • Anonymous says:

      Dear ‘young’ Laurence,
      great to hear from you and very interesting to learn how you use and interpret bid/offer spreads in the options market. This is a new way to look at what I suppose is implied volaltility on options. I also realise that at times of extreme market volatility and fear spreads, as we say in the UK, are wide enough to drive a bus through them. Again I agree with you, this is so often a warning sign that something’s reached a peak/abyss.
      Best regards,
      Nicole Elliott

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The views and opinions expressed on the STA’s blog do not necessarily represent those of the Society of Technical Analysts (the “STA”), or of any officer, director or member of the STA.

The STA makes no representations as to the accuracy, completeness, or reliability of any information on the blog or found by following any link on blog, and none of the STA, STA Administrative Services or any current or past executive board members are liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use.

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About Nicole Elliott

Nicole Elliott

A graduate of the London School of Economics and Political Science (BSc Social Psychology) Nicole Elliott has worked in banks in the City of London for the last 30 years. Whether in sales, trading or forecasting technical analysis has always been the bedrock of her thinking. Key expertise lies within all areas of treasury: foreign exchange, money markets, fixed income and commodities.

She has also added to the body of knowledge of the industry writing the first western book on Ichimoku Cloud Charts. Strong media links and a cult following are due to her prescient calls on the markets and often entertaining format.

Nicole can be contacted at trending@sta-uk.org

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