Directional movement can also be important when analyzing the slope. A negative and rising slope shows improvement within a downtrend. A positive and falling slope shows deterioration within an uptrend. Chart 3 shows the Nasdaq 100 ETF (QQQQ) with the 100-day Slope. A 20-day simple moving average was added to identify upturns and downturns. A Slope is rising when above its 20-day SMA and falling when below. Four key crossovers are identified on this chart (green/red arrows). Notice that the crossovers occurred before the Slope turned negative or positive. This is like a leading indication for the Slope. Also, notice the bounce after the negative cross in July 2008 and the retest after the positive cross in January 2009. These early slope reversals foreshadowed a move into positive territory or a trend change, but you should not expect an extended move after every moving average crossover. The 100-day Slope moved below its 20-day SMA in August 2009, yet QQQQ kept moving higher. A declining and positive Slope reflects less steepness in the advance. Notice how the 100-day Slope remained positive as QQQQ continued higher from September 2009 to January 2010.


Trade Bias
Slope alone cannot be used to participate in an ongoing trend, but it can be used with other indicators to identify potential entry points. In particular, Slope can be used for trend identification to establish a trading bias. A positive slope dictates a bullish bias, while a negative Slope dictates a bearish bias. Once a trading bias is established, a momentum oscillator can be used to identify potential entry points. The choice of momentum oscillator is really a personal preference. The example with Apple uses the 100-day Slope with 10-day Williams %R. The look-back period for the Slope should be significantly longer than the look-back period for the momentum oscillator. The Slope defines the bigger trend, while the momentum oscillator represents a subset of that trend. Chart 4 shows the 100-day Slope moving above zero in July to establish a bullish bias. Only bullish signals are considered for the momentum oscillator. These include oversold readings, centerline crossovers, or signal line crossovers. Williams %R does not have a signal line, but MACD and PPO do. The blue dotted lines show when 10-day Williams %R moves below -80% to become oversold. Notice that these readings correspond with short pullbacks in the stock. Except for the last oversold reading in early December, Apple resumed its uptrend soon after these oversold readings.

Relative Strength
The Slope of two (or more) securities can be compared to identify relative strength and relative weakness. The chart below shows Amazon (AMZN) with the S&P 500. Both securities are shown with the 20-day Slope (black). The blue vertical line marks a point in early November when Amazon had a positive Slope and the S&P 500 had a negative Slope. Amazon was clearly outperforming the S&P 500 at this time. In fact, when the S&P 500 bottomed in early November, Amazon led the way higher with a move from 117 to 143. Notice that Amazon moved higher even as the Slope moved lower. The Amazon Slope turned negative in mid-December and the S&P 500 Slope was still positive. This situation repeated the second week of January. Based on the Slope comparison, Amazon went from relative strength in November to relative weakness in December and January. During these two months, the 20-day linear regression for Amazon was sloping down while the 20-day linear regression for the S&P 500 was sloping up.


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Gold Forecast

Slope measures the rise-over-run of a linear regression. In general, an uptrend is present when Slope is positive and a downtrend exists when the slope is negative. The timeframe depends on the number of days. 10 days covers a short-term trend, 100 days a medium-term trend, and 250 days a long-term trend. As with typical trend-following indicators, Slope lags price and reverses after an actual top or bottom. This does not, however, detract from its usefulness. Trend identification and trend strength are important tools, even for traders. As with moving averages, Slope can be used with momentum indicators to participate in an ongoing trend.

Measuring overbought and oversold conditions can be tricky with Price Channels. Securities can become overbought and remain overbought in a strong uptrend. Similarly, securities can become oversold and remain oversold in a strong downtrend. In a strong uptrend, prices can move above the upper channel line and continue above the upper channel line. In fact, the upper channel trend line will rise as price continues above the upper channel. This may seem technically overbought, but it is a sign of strength to remain overbought. Similarly, the Stochastic Oscillator can move above 80, which is technically overbought, and remain overbought for an extended period.

Successful use of overbought and oversold levels depends on successful trend identification. Once a bigger uptrend has been identified, traders can look for oversold levels in the smaller trend. Short-term oversold levels occur after a pullback within a bigger uptrend. As noted above, the weekly charts turned bullish when QQQQ surged above the upper channel line. Once the weekly chart is bullish, traders can turn to the daily chart to look for oversold signals. The weekly chart represents the bigger trend, while the daily chart represents the smaller trend.


The chart above shows daily prices for QQQQ. The bigger trend (weekly chart) is up so we would be looking for pullbacks on the daily chart. The green arrows show when QQQQ dipped below the 20-day Price Channel. There were two good signals in early July and early November. There were three touches in January-February. The first two signals were “early”, while the February signal was a direct hit.

Inverse logic can be applied in downtrends. A weekly downtrend starts with a plunge below the lower channel line. Once this downtrend is established, chartists can turn to the daily chart to look for overbought signals. Overbought signals occur after a bounce within a bigger downtrend. Downtrends tend to be faster than uptrends. This means overbought readings may not occur during a strong or fast downtrend. Chartists may then need to tweak the Price Channel settings or use the centerline for signals. Prices are more likely to touch the centerline than the upper channel line.

Price Channels tells us when a security reaches an xx-period high or an xx-period low. 20-day Price Channels mark the 20-day high-low range, 10-week Price Channels mark the 10-week high-low range. The centerline marks the midpoint. Securities that continuously exceed the upper channel line show strength. After all, it takes strong buying pressure to forge higher highs. Conversely, securities that continuously break the lower channel line show weakness. Strong selling pressure is evident with lower lows. Using Price Channels, chartists can determine the dominant force, buying pressure or selling pressure. As with all indicators, it is important to use other analysis techniques to confirm or refute the Price Channels. Chartists can use chart patterns, indicators or basic chart analysis to complement Price Channels.


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Gold Forecast

The ZigZag feature can be used to filter out small moves and make Elliott Wave counts more straightforward. The chart below shows the S&P 500 ETF with a 6% ZigZag to filter moves less than 6%. After a little trial and error, 6% was deemed the threshold of importance. An advance or decline greater than 6% was deemed significant enough to warrant a wave for an Elliott count. Keep in mind that this is just an example. The threshold and the wave count are subjective and dependent on individual preferences. Based on the 6% ZigZag, a complete cycle was identified from March 2009 until July 2010. A complete cycle consists of 8 waves, 5 up and 3 down.


Retracements and Projections
SharpCharts users can choose between the normal “ZigZag” and “ZigZag (Retrace.).” As shown in the examples above, the normal ZigZag shows lines that move at least a specific percentage. The ZigZag (Retrace.) connects the reaction highs and lows with labels that measure the prior move. The numbers on the dotted lines reflect the difference between the current ZigZag line and the ZigZag line immediately before it. For example, the chart below shows Altera (ALTR) with the 15% ZigZag (Retrace.) feature. Three ZigZag lines have been labeled (1, 2 and 3). The dotted line connecting the low of Line 1 with the low of Line 2 shows a box with 0.638. This means Line 2 is .638 (63.8%) of Line 1. A number below 1 means the line is shorter than the prior line. The dotted line connecting the high of Line 2 with the high of Line 3 shows a box with 1.646. This means Line 3 is 1.646 (164.6%) of Line 2. A number above 1 means the line is longer than the prior line.

As you may have guessed, seeing these lines as a percentage of the prior lines makes it possible to assess Fibonacci projections. The August decline (Line 2) retraced around 61.8% of the June-July advance (Line 1). This is a classic Fibonacci retracement. The advance from early September to early November was 1.646 times the August decline. In this sense, the ZigZag (Retrace.) can be used to project the length of an advance. Again, 1.646 is close to the Fibonacci 1.618, which is the Golden Ratio used in many projection estimates. See our ChartSchool article for more on Fibonacci retracements.

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Gold Forecast

The ZigZag and ZigZag (Retrace.) filter price action and do not have any predictive power. The ZigZag lines simply react when prices move a certain percentage. Chartists can apply an array of technical analysis tools to the ZigZag. Chartists can perform basic trend analysis by comparing reaction highs and lows. Chartists can also overlay the ZigZag feature to look for price patterns that might not be as visible on a normal bar or line chart. The ZigZag has a way of highlighting the important movements and ignoring the noise. When using the ZigZag feature, don't forget to measure the last line to determine if it is temporary or permanent. This line is temporary if the current price change is less than the ZigZag parameter, but becomes permanent if the price change is greater than or equal to the ZigZag parameter.