QUESTIONS:
- How are the Price Wave Analysis charts constructed?
- What indicators do the charts produce?
- How are the indicators to be interpreted?
- How do I use the controls to change chart settings?
- What are the best settings to use?
- How do I use the "compare charts" feature?
- How do I use the Stop-Loss feature?
ANSWERS:
Q1. How are the Price Wave Analysis charts constructed?
A. Price Wave Analysis (PWA) charts use centered moving averages to smooth and show the current trend of price movement. The advantage of using a centered moving average is that it falls in the middle of the price line data. The colored price range bands are derived from the centered moving average. The bands indicate whether or not the price today varies enough from recent averages to warrant a buy or sell decision and serve to highlight buying and selling opportunities.
The MACD chart is constructed using two moving averages; one long and one short. The long average is graphed as a straight line and the short one shows as vertical bars indicating the daily difference between the two averages.
PWA operates as one oscillator within a second oscillator. The price line oscillates within the price range bands, and the bands them selves oscillate according to longer term market trends.
Q2. What indicators do the charts produce?
A. There are three indicators you'll want to watch:
- Which band the price is in today.
- The trend of the bands.
- The relationship between the MACD long and short averages.
Price location:
- The white band is neutral.
- Buy bands are light green and dark green.
- Sell bands are orange and dark red.
- Note that the dark green and dark red bands do not show until the price line enters them.
Bands trend:
- A down trend tells us the price will likely (but not always) move down further.
- An up trend tells us the price will probably rise.
- The steeper the trend the stronger the above will occur.
- A flat trend occurs when the market (or our stock price) is moving laterally. Lateral trends are positive since buying and selling opportunities will be presented.
MACD averages relationship:
- A diverging relationship (steps moving away from the straight line) indicates the price will move further.
- A flattening short moving average tells us the price could move further but not much.
- A converging relationship (steps moving toward the straight line) indicates the price will not move much further and it's time to make a decision.
Q3. How are the indicators to be interpreted?
A. Usually the action decision time will be when the MACD flattens (two or more days at the same level) or begins to converge, but not always. If the trend is steep, it overrides the MACD. When the trend is shallow or flat, the MACD indicator becomes most important. Here are some possible scenarios:
- Price is in a buy or sell zone, trend is shallow or flat, MACD is diverging.
- Price will likely move further.
- Action = check again tomorrow.
- Price is in a buy or sell zone, trend is shallow or flat, MACD is flat or converging.
- Price is unlikely to move further.
- Action = Decision time, we have a buying or selling opportunity.
- Price is in a buy or sell zone, trend is steep.
- Price is highly likely to move further regardless of what the MACD shows.
- Action = check again tomorrow.
- Another sort of mechanical rule a person can use is to buy or sell when the price line leaves a band. This rule can be useful if, for whatever reason, one did not choose to respond to the above indicators.
Q4. How do I use the controls to change chart settings?
A. There are three control sections below the charts for setting chart parameters. The top one contains dialog boxes for "Process Start Date" and "Band Widths," the middle one has dialog boxes for "Centered Moving Average Days" and a drop down menu "Select Symbol" for bringing up the charts you are interested in seeing, and the third contains "Enter Period to Display" selection buttons and a button for "Compare Charts."
- In the Process Start Date dialog boxes you can enter any date from 1/1/2000 forward to see the charts as you would have originally seen them at that time. After you've set the date, clicking on the "Update Chart" button will bring the chart up for the date you have selected.
- Band Width dialog boxes will show the default settings which will be in "points" for the S&P 500 but in dollar amounts for company charts. To change, enter the numbers you want and click on "Update Chart."
- For the "Centered Moving Average Days" dialog boxes and the MACD short and long boxes enter the number of days you want to see. Generally you will want to leave the MACD short average at ten days, and you would set the MACD long average to the same number of days as you did the centered moving average.
- With the "Enter Period to Display" buttons you can elect to view yearly, semiannually, quarterly, or monthly chart displays. All the charts will have the ability to show price levels for any date using the cursor "roll-over" feature. For the quarterly and monthly chart you can use the cursor to find band levels for any date as well.
Q5. What are the best settings to use?
A. The answer depends a lot on a person's objectives and their willingness to put a little time and effort in systematically monitoring their investment charts.
- Settings with widely spaced bands and long centered moving averages will highlight fewer buying and selling opportunities but with comparatively larger price moves.
- Settings with shorter moving averages and tighter band settings will highlight more buying and selling opportunities but with comparatively smaller price moves.
- The shorter settings, tighter bands, with lesser price moves per trade will produce significantly more total returns.
- In general the outer band should be set so that recent rallies show some dark red and some dark green. This will help identify significant buying and selling opportunities with increased confidence.
- To check the difference in returns the settings will make, I refer you to the "Results" page tables and the comparison charts of this website.
Q6. How do I use the "compare charts" feature?
A. With the compare charts feature you can compare any two charts to assess which company will likely perform better. You can also compare any chart to the S&P 500 Index to see whether or not a company chart shows crests and troughs that occur at the same time as "the market" as a whole. The process is as follows:
- Use the drop down "Select Symbols" menu to pick the first chart.
- Click the "Compare Charts" button.
- On the drop down menu click the second chart.
- Click "Up date" and two labeled chart lines will appear in a chart window: which will look differently showing % change to the left and right of the window.
- Below the resulting chart, two select symbols drop down menus will show.
- You can compare any two charts from our list by changing the selection in either drop down menu.
This feature is a valuable tool when you are deciding which companies to use for your PWA investment program.
Q7. How do I use the Stop-Loss feature?
A. The controls for the Stop-Loss feature of PWA charts are in the last control row below the chart window. The controls are; "Date", "Amount", "Add", "Change", "Delete", and "Next SL" (your alphabetically next chart with Stop-Loss settings you've made.) The process is as follows:
- In the "Date" dialog boxes enter the date you want the stop-loss line to start. (If you're doing a back study in which you have set a start date, you will still need to set the stop-loss start date.)
- Enter the stop-loss level you want to use in the "Amount" dialog box.
- Click "Add" and the red stop-loss line will appear on your chart. (If the date is the same as the last date on the PWA price line chart, the line start will show as a red dot which, as the days pass, will become a line.) The line will extend forward each day until you change or delete it.
- To change the line, up or down, enter a new stop level in the "Amount" box and click "Change."
- To delete the line, simply click "delete" on the control tool bar.
The Stop-Loss feature is also a valuable tool and it is recommended that when you buy a stock you also set a stop-loss line. It is insurance against the disaster of the stock plunging unexpectedly, and if you look at the S&P chart in history, the stop-loss would have been exceedingly useful in Bear markets of late 2000, 2001, and 2008.
Setting the stop-loss level is a matter of judgment and we have no precise recommendation to make. If you set the line too close the price may drop below the line and start rising again immediately. If you set the line too low, your loss (should the market move against you) will be more than necessary.
As your stock moves higher, you can lock in profits by moving the stop-loss line higher while maintaining you chosen spacing below the price of the day.