Stock Charts

Options in the Stock Charts menu provide for display of technical analysis charts. Each time you select one of the three options in the Stock Charts menu, the Chart Span dialog box will be displayed allowing you to enter the duration (i.e., 6 months, 1 year, 2 years or 3 years) and the ending date (i.e., date of the last point plotted) of the chart. Charts plotted for duration’s of longer than 6 months use weekly composite data formed from daily quotes. A weekly composite quote is formed by extracting opening price, highest high, lowest low and the closing price for the week.

The Options button on the Chart Span dialog box provides access to additional chart display options as shown below. Once set, the option settings remain in effect until changed.

Table X-1: Chart Options Dialog

Option Description

Candlestick Chart This option enables plotting of technical analysis charts in the candlestick format instead of the default bar chart format. Candlestick charts are useful in recognizing patterns of opening versus closing prices. When the opening price is less than the closing, the price range between the opening and closing price is displayed as an open box. Conversely, when the opening price is greater than the closing price the range is displayed as a filled or solid box. Hint: if you imported or entered data that lacks valid opening prices the candlestick chart will not produce valid results on 6 month charts.

Show Price Grid

Show Date Grid

When enabled, a horizontal price grid and vertical date grid is drawn on the chart. You may want to disable these options if you are planning to print the chart on a non-color printer.

Show Target/Stop Loss Prices When enabled, horizontal lines showing the defined target price and stop loss price are plotted on the chart. The lines are plotted only when they are within the range of prices plotted on the chart. The Target line is plotted in green and the Stop Loss line is plotted in red.

Use Log Scale for Prices When enabled, the price portion of the chart will be plotted using a logarithmic scale instead of the default linear scale. Logarithmic scaling has the advantage of showing equal percentage price moves with the same vertical change regardless of the actual price.

After entering the chart span and setting any display options, you will select the security or in the case of the Relative Strength and Correlation charts the two securities to be plotted.

Along the bottom of each stock chart there are a series of command buttons that provide access to technical indicators and allow plotting of another security using the same chart span and option settings. Refer to the Technical Indicators section for a discussion of interpretation of technical indicators.

The function of the command buttons are described below.

Table X-2: Stock Chart Command Buttons

Button Description

New: After completion of your analysis, click the New button to select another security to be plotted.

MA: Plots a simple moving average based on the user defined number of weeks.

Exp: MA Plots an exponential moving average based on the user defined point weight.

Fit Plots a best fit 1st to 9th order polynomial curve. The "order" (1 to 9) of the polynomial is user defined. A first order polynomial is a straight line. Curvature and fit precision increase as the order of the polynomial increases.

OBV Plots On-Balance Volume.

MACD: Plots Moving Average Convergence Divergence based on the user defined fast and slow point weights.

RSI: Plots Wilder’s Relative Strength Index using a user defined period.

%KD: Plots stochastic oscillator (%K) and the slow stochastic oscillator (%D) using a user defined period.

Clear: Clears the bottom chart of volume or plotted oscillator data. Vol Re-plots the volume in the bottom chart

Single Issue
The Single Issue chart displays the industry standard Price/Volume chart or, optionally, a candlestick chart for one security at a time.

The Price/Volume chart is the basic chart shown in most newspapers. It provides a graphic display of the open, high, low and closing prices, and trading volume. The price portion of the chart is scaled to provide the maximum vertical distribution of prices. That is, it is vertically stretched to just cover the range of prices to be displayed.

Relative Performance
The Relative Performance chart compares the price movements of two different securities. After entering chart duration and any option changes, select the two securities to be charted together. Prices for the first security you chose will be displayed on the left axis and prices of the second security will be displayed on the right axis and are color keyed to the plotted prices. The relative performance is plotted at the bottom of the chart as an area plot. A rising line indicates that the primary stock (the first stock selected) is performing better than its counterpart.

Relative Performance, also known as relative strength or ratio cantor is most commonly used to compare a stock to a known index. The best index to use for a given stock is an index that is well correlated with the stock to be examined. Therefore, when analyzing a semiconductor stock it would be best to compare it to a “Tech” stock index or the NASDAQ index which is heavily weighted in technology stocks.

The common interpretation of Relative Performance is to buy stocks that are outperforming their market sectors and sell stocks when they are underperforming their market sectors.

Correlation
Correlation is the statistical means of determining whether the prices of one security move in direct relation to the prices of a market index or another security. After entering chart duration and any option changes, select the two securities to be used in the correlation analysis.

Correlation analysis operates by plotting a scatter-gram of the closing prices of the first security (measured on the y-axis) against the closing prices of the other security or index (measured on the x-axis). Once the points have been plotted, the straight line that best fits the points is computed and plotted. The line is computed using a least squares linear regression. The program displays the formula for the plotted line, the standard deviation (the standard error between plotted prices and the line), and the correlation coefficient. The mathematical formulation of these items is shown below.

Least squares linear regression line is defined by: Y = B +AX where:

A = (N* Sum(Xi*Yi) - Sum(Xi)*Sum(Yi)) / (N*Sum(Xi^2) - Sum(Xi) ^2)
B = (Sum(Yi)/N) - A*(Sum(Xi)/N) The standard deviation is given as S where:
S = Sqrt( (Sum(Yi - (B + A*Xi))^2) / (N - 2) ) The correlation coefficient "R" is given by:
R = (N* Sum(Xi*Yi) - Sum(Xi)*Sum(Yi)) /
Sqrt((Sum(Xi - Mean(X))^2 * (Sum(Yi) - Mean(Y))^2)

Correlation coefficients range from zero to plus or minus one and provide an indication of how good the price relationship is between the two securities. Values near plus or minus one indicate that there is a strong relationship between the price movements of the two securities. Values closer to zero (-0.75 to +0.75) indicate poor correlation. If the coefficient is negative, it means that a negative price relationship exists (a price increase in one yields a corresponding price decrease in the other).

After plotting the scatter-gram, a price chart of the first selected security is plotted. The solid fill area plotted on the price chart represents the solution to the least squares regression -- plus or minus one standard deviation (e.g., if the two securities were perfectly correlated then the solid fill area would be centered on the closing prices of the first security).

The Correlation Chart is most useful when there is a high degree of interdependence between two securities (i.e., correlation coefficient is greater than 0.9 or less than -0.9). Under these circumstances, a sudden deviation of the price outside the standard error area may indicate a change of market sentiment towards the stock. Such changes in sentiment are often the result of an unexpected change in earnings, a buy or sell recommendation from a major broker, takeover rumors, etc. It is always a signal to be wary.