Image Source: Pexels

As a technician, I talk and write about stock technical indicators a lot. They provide you with hard data about what the markets or a particular stock are doing. 

I looked back on years of blog posts and realized I never pulled them together in one blog post. Until today.

The most important stock technical indicators: price and volume

Price is driven by the basic economic principle of supply and demand. When demand is strong (and supply becomes scarce because everyone wants a piece of, say, Nvidia), prices are pushed higher. When demand is weak (and supply increases because everyone is shedding Victoria’s Secret & Co.), prices fall. 

Volume is the number of shares being bought or sold. A higher volume of buying than normal in Nvidia shows very strong interest in that stock. On the flip side, a high volume of selling means people are fleeing Victoria’s Secret & Co. 

I follow volume closely because it indicates if “big money” is flowing into a stock. Big money is the hedge funds, mutual funds, pension funds, endowments, trusts, banks and other institutions that make up 80% or more of the market’s liquidity. 

Trend indicators

The MACD (moving average convergence/divergence) identifies price trends and measures that trend’s momentum. It can help you identify when to buy or sell a stock or option.

Moving averages calculate the average price of a stock over a certain time period – 20 days, 50 days, 100 days, 200 days, etc. If the moving average of a stock is rising, it’s in an uptrend. If the moving average is declining, it’s in a downtrend.

New highs/new lows show how prices of individual stocks are doing, aka, what kind of response they’re getting from traders. When a stock is consistently making many new highs and fewer new lows, the trend is bullish. On the other hand, when new highs start to fall and new lows begin to climb, the trend is turning bearish.

The bullish percent indicator isn’t discussed a lot, but it’s one I really like. It tells you how many stocks have a buy signal on a point/figure chart. A key level to watch is 50. A cross below it could be considered rather bearish, while a cross above is bullish.

Momentum indicators

Stochastic oscillators are the most accurate and reliable technical tools for determining timing. Stochastics measure the relationship between a security’s closing price and its price range over a set timeframe. These indicators are easy to read, as they show when price action hits overbought and oversold levels.

The RSI (relative strength index) tells you if a stock is overbought or oversold, and it tells you if a stock is an uptrend or downtrend. 

The money flow index (money flow for short) analyzes price and volume to measure the flow of money into and out of a stock. It can also help you understand sentiment. Are traders pouring money into a stock? They’re feeling bullish. Are they selling like crazy? They’re feeling bearish. 

Option flow measures the flow of money into and out of options by the big money. An analysis tool will tell you the trade size and the trade type (buy or sell), and the name that is being traded. 

Volatility indicators

The volatility index (more commonly referred to as the VIX) measures implied movements (of stocks, an index, etc.) over the next 30 days. A higher VIX (more than 20) means the range in which prices are moving is expanding. A lower VIX reading (less than 20) tells you that prices aren’t moving much. 

Bollinger bands chart volatility by using bands that are deviations above and below a relevant moving average. The bands expand and contract as volatility increases and decreases. 

Breadth indicators

The McClellan Oscillator looks at daily breadth (issues up versus issues down) by market (SPX 500, Nasdaq, etc.) and accumulates the data in different formats. Essentially, it tells you the strength of price moves, demand, and possible changes in price trends. 

My favorite is the Chaikin Oscillator. When it and price diverge, that’s a signal that the current price trend will reverse. 

The Summation Index provides a big picture of market shifts, when you should apply more pressure to the bullish or bearish side, and when crossovers occur around the zero line.

The Arms Index, or TRIN (Traders Index), uses a ratio of advancers/decliners divided by up/down volume. In general, a reading over one is considered bearish; under one is bullish.

The Accumulation/Distribution (A/D) index moves up or down based on the breadth numbers from the NYSE and Nasdaq. When the oscillator is moving higher and reaches overbought readings, a decline in the index is likely to happen very soon. Conversely, when a deep oversold reading occurs (see the chart below of the Nasdaq 100 oscillator) then a rally is likely to ensue within days.

More By This Author: