Friday, October 16, 2009

Thenkulam Index

From technical perspective market is said to be strong if demand for stocks rises despite increase in stock price and volume declines as the price slides. The following chart shows the relationship between stock price and volume traded in a strong market

In a weak market the relationship gets reversed, volume increases as price declines and vice versa. The following chart shows relationship between price and volume traded in a weak market

Based on these premises a new technical analysis too is developed to gauge the strength of the market which is ratio of % change in price and % change in volume. In strong market the ratio will be positive and negative otherwise

Fine tuning the tool further the Thenkalam Index looks at relative strength temporally; the derivation is as follows
· X = 1 if the ratio is positive (i.e. the market is strong) and 0 if the ratio is negative
· Thenkalam Index = 20 day MA of X – 40 day MA of X

If the index indicates that the market is stronger when the index rises above zero and weaker when the index is below zero (refer to the chart given above)

The following chart shows the difference between 5 day moving average and 10 day moving average. We can see that the market broadly rallies after a spike in the index

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