foxex: Balance of Power

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, December 09, 2019

1. Stocks hold against resistance

2. Amgen example: the Balance of Power indicator

3. Cannabis Growth Corporation moving higher

Market Moves

Stocks closed slightly lower after last week's rebounding price action. The S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all closed more than one-third of a percent lower, while the Russell 2000 (RUT) was lower by only .2 percent, setting up the possibility that opportunistic investors are hanging around and shopping for investment bargains.

Market analysts and fund managers are preparing for an update to the Fed's monetary policy later this week (Wednesday). Today's price action likely reflects a reluctance to commit to a particular line of action before then. Absent such news, any retail, at-home trader or investor might wonder how they could be wary of short-term news sellers that might push the market around for their own advantage.

There are simply too many market participants and too many cross-currents inherent in their decision making to be able to know with certainty when the market is artificially oversold. That point acknowledged, however, one particular indicator that seems to produce better-than-random results at gauging such moments is known as the Balance of Power indicator.

In the chart below the indicator is applied to the S&P 500 over the past four months. This indicator simply takes the difference between the open and close of the trading session and divides it by the difference between the high and the low of the trading session. (If you think about it enough you will realize that a tall green candle that opens at its low and closes at its high would register a 1.00 score with this calculation).

It is interesting to note that the lowest scores of this indicator turn out to be excellent indications for when the price action is statistically more likely to rebound in a mean-reversion price action over the next week or so. In the chart shown below, the green circles indicate times where entering on the opening price of the next day and holding for at least five days yields a profit, the red circles a loss.

Amgen Example: the Balance of Power Indicator

A more detailed example of this indicator can be found in the chart below. This chart of Amgen (AMGN) was generated from Investopedia's own charts that open when an in-line ticker symbol is clicked on by a reader. When these charts are open the Balance of Power indicator can be applied. Any time this indicator dips below a -.7 reading, it may be an indication that a little more selling than buying has taken place and the price may be pushed a little too low in a short-term duration.

The chart below registers all the times this has occurred on Amgen over the past year. The green arrows represent times where buying the opening price of the next day and holding for five days results in a profitable trade. The red arrows represent the incidents where such a trade resulted in a loss. This particular signal is potentially useful for those looking for prices that pushed lower, for whatever reason, in a potentially artificially-motivated price action.

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Cannabis Growth Corporation Moving Higher

Traders and investors interested in opportunities to find growth in the Cannabis industry have been disappointed for most of the past year. Today's price action marked the most significant rise in the past six months. It is likely to be too early to declare the bear market in cannabis stocks over, but it marks a moment worth noting. The move in Canopy Growth Corporation (CGC), shown in the chart below, may have professional investors putting the industry back on their radar screens.

The Bottom Line

Stocks fell back from previous resistance as the market timidly awaits a Fed announcement later this week. Looking at the S&P 500 index and other stocks through the lens of the Balance of Power indicator may prove useful for identifying unnecessarily oversold stocks in this environment. Meanwhile, Canopy Growth Corporation, a major Cannabis industry player, showed its first strong movement in six months.