Contents of Glossary:
BEAR Market and BEAR Market (50% signal)
Hybrid Short-Term/Long-Term System
Run, RunLight and Run-5 Market States
Two Hundred Day Moving Average
After Hours Signal Negated. If a BUY or SELL signal, which relies on the up and
down volume figures in the five day moving average (5DMA), is negated because
after-hours, the 5DMA changes in such a way that a signal would not have occurred, then one
may re-institute the position on the opening the next day, but this is not required.
Arm-and-Fire-The term comes from the fact that to launch a large missile
you don’t just push a button, you first “arm” the missile by turning a key
(or whatever), then you “fire” it by pushing a button, or whatever. In other
words, it is a two-step process. Now it is important to know that in the
arm-and-fire sequence the five day moving average (5DMA) half-signal
must occur FIRST and the S&P500 half-signal must occur SECOND, and
NOT the other way around. Also, if the S&P fails to turn on the "fire"
day, the arm signal will die and does not carry over to the day following. In
that case the regular rules apply, meaning simultaneous turn of both
half-signals is required for a BUY or SELL signal, or a new Arm may be
set up on the "fire" day.
BEAR MARKET and BEAR Market (50% signal)-
Old Definition: When the average of the 200 BUSINESS days (40 weeks)
moving average (200DMA) stops going up and turns DOWN, AND the
S&P 500 index is BELOW the said 200DMA line, this is the definition of the
start of a BEAR market. The market stays in BEAR trend until it becomes
BULL, there is no neutral trend (although we may change this one day). It is
believed that this definition was developed by Standard and Poor's Co.
30-40 years ago or more, and may or may not have been publicized, and may
or may not be used by them at this time. This definition has been shown to
be accurate for several decades in our data collection. The 200 CALENDAR
days moving average is NOT the average to use for this. Declaration of a BEAR
market generates an immediate SELL signal.
New Definition: We have seen an apparent conflict between the forty week moving
average (40 WMA) and the nine month moving averages (9MMA) for a BEAR
market signal (both of these averages are about 200 business days). The 9MMA
cant register a signal until the end of a month. In the recent
past we have seen that the 9MMA correctly AVOIDED giving a BEAR market
signal, while the 40WMA gave such a signal. This happened on 10/15/2004 and
10/5/2005 (see Long-term Investor's page, Table 1), where we got a 40WMA
BEAR market signal, only to be reversed a month later with a new BULL market signal.
The 9MMA never signalled a BEAR market. For Long-term Investors, that kind
of whip-saw is not welcome (if only for tax reasons). Therefore we are recommending
that long term investors sell out only 50% of their holdings on the 40WMA BEAR
market signal (we're calling this the 50% BEAR market signal) and sell the remaining
half on confirmation by the 9MMA.
Bogey- The "sell bogey " is the near-term high closing S&P500 average after
which a SELL or SHORT SELL signal is given. Thus the sale occurs on the day after
the bogey is seen (unless an ARM & FIRE occurs, in which case it is the second
day after the bogey). The "buy bogey" is the near-term low price after which
a BUY signal is given (ignoring RunLite BUY signals, since they do not occur after
a minor low). Thus the buy occurs on the day after the bogey price
is seen (unless an ARM & FIRE occurs, in which case it is the second
day after the bogey).
BULL MARKET -When the average of the 200 business days (40 weeks)
moving average (200DMA) stops going down and turns UP, AND the S&P
500 index is ABOVE the said 200DMA line, this is the definition of the start
of a BULL market. The market stays in BULL trend until it becomes BEAR,
there is no neutral trend (although we may change this one day). Declaration
of a BULL market generates an immediate BUY signal. Usually the market
state will be OSCILLATORY when a BULL market is declared. Thus the
first SELL signal will be under OSCILLATORY state rules.
Busted- A trade is said to be busted when the S&P500 average closes
below the bogey value if your trade was long (you bought stock), or closes
above the bogey price (plus 1.5 S&P points) if a short trade (you sold the stock
short). In the latter case, the
difference between the S&P500 closing average and the bogey must be
1.5 S&P points for the trade to be considered busted. Less than 1.5 points
below or above the bogey is not considered significant. [changed points from one to
1.5 on 2/28/06]. If a short sale, we cover the short (buy back) if the trade is
busted, if a long trade we do NOT sell out when the trade is busted.
If we have no positions on, then an S&P close below a previous minor low does not
trigger a change in Market State.
BUY signal- A BUY signal occurs when the 5DMA of the OBV is below the
lower threshold and then turns up, AND the S&P500 average turns up.
They must be simultaneous. But see ARM-and-FIRE for non-simultaneous
signal.
CLEAN/DIRTY- The terms are used for several different market states or flags.
Clean usually means an action is permitted; Dirty that it is not permitted (or at
least strongly dis-recommended) by System rules.
Exchange Traded Funds-These are baskets of stocks so constituted as to match
a particular index, and traded just like individual stocks on an exchange. Examples
are QQQQ for the Nasdaq 100 and SPY for the S&P500. A list of all known funds
with their trading symbols is included on the ETF page.
Five Day Moving Average-We calculate daily the average of the most recent
5 business days' on-balance volume (OBV). This is the meaning of the 5 day
moving average (5DMA) of the on-balance volume. This average, when
plotted versus time makes an oscillator (goes up and down) about a zero
volume line. The units of the volume are millions of shares per day. If we
have threshold lines at about +20 and -20 (millions per day), for a BUY
half-signal we need to be below the -20 million line and then see a turn up in
the 5DMA of the OBV. For a SELL half-signal we would have to be above
the upper (+20) threshold and turn down (as well as have the S&P500
average turn down simultaneously--other half of the signal).
Four Point Short Selling Rule- When selling short based on a decline in the S&P500
from the previous day's close, that decline must be at least four points, or we are not
permitted to sell short. The reason is that history has shown (many times) that it
is too easy for the S&P to rally up the next day by five points and bust out the trade
by exceeding the bogey by one point, which is our rule for closing out a losing short sale.
Hybrid Short-Term/Long-Term System-This System simply uses the Field
Short-Term System in a BULL market and the Long-Term System in a BEAR
market. In the Long-Term System in a BEAR market we have no positions, so
actually we get money-market interest rate returns in a BEAR market. This System
shows larger returns over time than either the Short-Term or Long-Term System
alone. We need a new rule to accommodate the transition from BULL to BEAR
market and vice-versa. This rule is: when a BULL market is declared, one must
immediately purchase the stock(s) one was planning to purchase. And when a
BEAR market is declared, if one is long stocks, one must immediately SELL them.
Following normal Short-Term System BUY and SELL rules when transitioning
from BULL to BEAR and vice-versa results in less profit than the rule just stated.
Intermediate Down Trend--An intermediate term down trend is declared
True when the chart pattern of the S&P shows lower minor lows and lower minor
highs over a period of approximately two months, or when the Intermediate term
Uptrend line is broken on the downside, which ever occurs first.. When this occurs,
we change the Long-Purchase State to Dirty, meaning that we scale in our purchases;
using 50% of available funds on first BUY signal, then 25% more on second
BUY signal, etc. When the downtrend line is broken on the upside we declare
the IDT false, meaning the downtrend is over. Intermediate Term Investors
can BUY on the first Short-term BUY signal after the IDT is declared false.
When this occurs, 100% of available funds may be committed to stocks.
Intermediate-Term Investor -If you like to trade no more frequently
than every couple months or so, then you are an Intermediate term investor (ITI).
This is as opposed to short-term investors who can trade every few days or
weeks without difficulty, and Long-term Investors who dont want to trade
more than every year or so.
Long Purchase State- Long purchase simply means you BUY some stock
(as opposed to a Short Sale). The Long Purchase state stays fixed as Clean
during a BULL market and fixed as Dirty during a
BEAR market. When this State is Dirty, we BUY with
only 50% of available funds on first purchase, and then 25% on second
BUY signal, then 12 % on 3rd, etc, so that we never run out of money to
BUY. "Available funds" means that portion of the account that has been
allocated to stocks. When State is Clean we can BUY with 100% of
available funds (if desired) on the BUY signal.
For more than three BUY signals in a row, see Market State BEAR/Plunge
discussion and Special SELL rule.
Margin- The use of funds borrowed from your broker to purchase (or sell
short) stocks. You must put up 50% of the purchase price in cash and the
other 50% (current Fed-regulated percentage) is loaned to you by your
broker at a stated interest rate. This is said to be a 50% margin rate.
Market State- The four market states are, from most bullish to most bearish:
Run(away), Run-5, Oscillatory, and Plunge. Run stands for runaway; this state occurs
when the S&P500 has made an ALL-TIME NEW HIGH within the last two weeks.
Run-5 is the state the market lapses into after two weeks without the S&P500
making a new all-time high. This is also the state the market rises to when a short
sale in Oscillatory state is busted, while in a BULL market. Oscillatory state is that
into which the Run-5 state lapses when a long bogey is violated. The Plunge state
occurs in a BEAR market only when three BUY signals in a row have occurred
(without any intervening SELL signal). In Plunge state, we can SELL on the
Special SELL signal (qv). A Run state also lapses into a Run-5 state if a bogey
is violated after a BUY, AND the previous bogey is also violated. Thus we must
note the bogey for every
BUY signal. If the PREVIOUS bogey is not also violated, then the state does
not change from Run to Run-5. The two week time rule still applies though.
Natural SELL-Natural SELL signal occurs when 5DMA moves above about
+20 (actual number is proprietary) and turns down, with simultaneous turn
down in S&P500 (subject to Arm-and-Fire rule). The other SELL Rule is the
Special SELL rule invoked when market is in PLUNGE state.
Notional- Trade occurs on paper only, to keep track of signals or other
important data, and a real transaction is not entered into.
On-Balance Volume-The volume of advancing stocks minus the volume of
declining stocks on the NYSE is called the on-balance volume (OBV); it can
be a positive or negative number. The volumes of advancing and declining
stocks are given in daily financial news sources or on the Nightly Business
Report (PBS)-given the next day in the Transcript at nightlybusiness.org.
Oscillatory Market State-Oscillatory state is that state into which the
Run-5 state lapses when a long bogey is violated. It is also the state into which
the Plunge state rises while in a BEAR market. If state is Oscillatory and Market
Trend changes from BEAR to BULL, or vice-versa, then state stays the same.
Over-Bought-When the 5DMA is above 400, we say the market is
over-bought. This means the market is more likely to decline in the short-term.
Over-Sold-When the 5DMA is below -400, we say the market is
over-sold. This means the market is more likely to advance in the short-term.
Plunge Market State-The Plunge state occurs in a BEAR market
only when three BUY signals in a row have occurred (without any intervening
SELL signal). In Plunge state, we can SELL on the Special SELL signal (qv).
When we get a Natural SELL signal in Plunge State, we are taken back
to the Oscillatory state.
QQQQ- The symbol for an American Exchange-traded stock that is a very
close approximation to the NASDAQ 100 average. See disclosure on
trademarks at bottom of this page.
Run, RunLight and Run-5- Run stands for Runaway and is the strongest market
state. It only occurs when the S&P500 has made a NEW ALL-TIME HIGH within
the last two weeks. A Run state lapses into a Run-5
state if a bogey is violated after a BUY. Thus we must note the bogey for every BUY signal.
If two weeks pass without S&P500 making a new all-time, the
market state drops to Run-5 (not to RunLight). The "-5" stands for the lower threshold
of the 5DMA below which a BUY signal can occur, instead of the +20 lower threshold
of Run state or the -28 of Oscillatory state. The Run-5 state is also declared
when a notional or real short sale is busted, if the market is in Oscillatory state while
in a BULL market. Run, RunLight, or Run-5 occur rarely in a BEAR market.
The RunLight state occurs if, in Run-5 state, a short-sale bogey is violated (that is, the
recent minor high that preceded the last sell signal is exceeded) by 1.5 S&P points or more.
Thus RunLight is intermediate in strength between RUN and Run-5. RunLight invokes
an immediate BUY, after which the state lapses back into Run-5 (immediately).
The SELL exit from a Run-5 state is normal (sell when both the S&P and 5DMA
turn down, after the 5DMA rises above the upper threshold of +2.5, or we have
an ARM&FIRE). A buy bogey violation after a RunLite or RUN signal gives an
immediate SELL signal but does not cause a lapse into OSCILLATORY
State. Only a buy bogey bust occurring after a normal Run-5 BUY causes lapse
into OSCIL state. Now three conditions are attached to the RunLight BUY signal: a) the
previous high (bogey) must be exceeded by at least 1.5 S&P500 points; b) it must be the
first invocation of the RunLight rule after a normal BUY-SELL trade, (second and
subsequent RunLite BUY signals in a row are covered below) and c) if the market state
changes from OSCILLATORY to Run-5 and the RunLight BUY signal occur on
the same day, the RunLight BUY signal is to be ignored; also that RunLite signal
is not to be counted as the first RunLite in a sequence.
The whipsaw rule does not apply to Run[] signals; i.e., a RUN or RunLight
BUY signal could occur the
next day after a normal SELL signal, and we would not invoke the whipsaw rule.
Short sales are not allowed by the System when in Run, RunLight or Run-5 states.
The RunLite State (flag), which has states of Dirty or Clean, indicates whether we can act on
RunLite signals after the first one in a sequence (designated RunLite>1). If the first RunLite
signal produces a loss, the RunLite State would change to Dirty. The next time we get a
RunLite>1 and it produces a profit, then the RunLite State would change to Clean,
and we assume further RunLite>1 signals will be clean. Any RunLite signal that
shows a loss (using the S&P500 as indicator and disregarding commissions, etc.),
changes the State from Clean to Dirty, and we then assume all further RunLite>1 signals
will also show a loss. We must do a notional trade on RunLite>1 signals when the
State is Dirty, so that we can change the RunLite State when necessary. The RunLite State
does not apply to the first occurrence of Run Lite in a sequence, which, if the signal
fits the other rules, is to be acted upon.
Scale-in- to buy or sell in steps during the day, so as to get more of an
average price. For example, buy 100 shares per hour in order to put on a
position of 700 shares in the day. Also refers to our BULL market practice of buying with only 50% of
available funds for equities on first buy signal in a sequence, 25% on second buy signal and
12% on third, etc, assuming there are no sell signals during that stretch of time. In a BEAR market
we invert the scale-in, buying 12% on first buy signal, 25% on second and 50% on third buy signal.
Short Clean (Opposite of Short Dirty-q.v.)-Field system terminology for a
market state wherein short sales are allowed (by the system). A market
changes from short clean to short dirty when a short sale is "busted" (see
short dirty).
Short Dirty (Opposite of Short Clean-q.v.)-Field system terminology for a
market state wherein short sales are not allowed (by the System). The
market changes from short clean to short dirty when a short sale is
"busted". According to the System, you should close out (buy back) the
short position if the "bogey" price is violated on the close. If you are at all
interested in doing short sales, then you must make the short sales on
PAPER only if the market is short dirty. These are called notional short
sales. You must do this to determine when the market becomes Short Clean.
When a paper trade short sale is successful, that is, closed by purchase on
a BUY signal before violating the "bogey", then the market becomes Short
Clean (q.v.).
Short Sale-Short selling is borrowing stock from a broker and then selling
it. You are said to be short the stock since you owe stock to the broker you
borrowed it from. Then, presuming the stock price falls, you buy back the stock
you previously sold, thereby evening out or “closing” the trade. Since you
sold the stock for more than you paid, you have a profit. If the price rises
above what you sold it for, and you buy it back then, you will have a loss.
This may sound illegal to some, but it is a routine procedure for stock
traders. It is like a farmer selling his crop for cash before he plants it. He is
short so many bushels. When the crop comes in, he delivers the corn to
satisfy the “debt”. Those contemplating selling short should see Four Point Short
SLIPPAGE-Slippage occurs when you do not receive the price you expect
when you place an order; i.e., the selling price is usually less than you
expect. Or when buying, you may have to pay more than you thought due to
passage of time while your order is being executed. It also refers to the inability
to execute multiple orders on the close, thus being unable to get the closing price
as expected.
Special SELL signal-Occurs in a BEAR market after three BUY signals in a
row (without any SELL signal) which causes market state to change to
PLUNGE. We can SELL when the 5DMA of the OBV rises above -100 (million
shares) and then turns down, while at the same time the S&P500 average
turns down (or an ARM & FIRE occurs).
SPY- Standard and Poor's Depository Receipts (symbol SPY) is an
American Exchange-traded fund that is a very close approximation to the
S&P 500 average itself. See trademark disclosures at bottom of this page.
State-see Market State
Sterile Signal- A signal given by the System upon which we cannot act since
we are already fully invested (in the case of a BUY signal).
Threshold- An empirically-derived value of the 5DMA of the OBV which
has shown to be a value above which (for sales) or below which (for buys)
there is about 80% chance that a profitable trade will result. Thresholds
vary by market state and market trend. They are proprietary values, given as
approximate values on the free site.
Two Hundred Day Moving Average (200 DMA)- A 200 day moving average
(40 weeks) is the value of the S&P 500 index averaged over the most recent 40
weeks (using the Friday close for each week). So every week a new moving
average is calculated, dropping the value 41 weeks ago and adding the
latest week’s value. Considerable research has shown the 200 calendar day
moving average is not as accurate as the 200 business day (40 week) average
at predicting BULL and BEAR markets. When a 200 DMA is mentioned,
one must be careful as to which average is being referred to.
VIX- The Volatility Index, calculated by the Chicago Board Options Exchange,
gives a measure of the bullishness or bearishness of put options buyers (of the
S&P500 options). "VIX is a
good surrogate for market sentiment. When everything is wonderful in the world,
nobody wants to buy put insurance, so VIX falls. But when it looks like the sky
is falling, everybody wants insurance in spades and VIX heads for the
moon."-http://finaxyz.com/vix.htm. When VIX is very low (compared to the
recent 6 months period) this signifies a market top, and vice versa.
Whipsaw State (Dirty/Clean)-When a transaction is CLOSED (such as you
own stock and you close by selling it on a SELL signal) on one day, and
the very next business day the opposite signal (BUY) is given, this is
known as a whipsaw. When a whipsaw occurs, we say the whipsaw state is
Dirty, and no further (BUY, in this example) signals will be acted upon as
long as state is Dirty (including the BUY signal that created the Dirty condition,
i.e. DO NOT BUY on this signal). But we have to keep track of signals so that
when a notional (on paper only) round-trip (BUY-SELL) transaction is followed
by a day when a whipsaw does NOT occur, then the state changes to whipsaw
Clean. If after OPENING a transaction, the opposite signal occurs on the
next business day, this is not a Whipsaw under the System definition (although
you may feel like you have been whipsawed!), and you must close the transaction.
The whipsaw rule does not apply to initiating a RunLight or Run BUY signal.
DISCLAIMER: Past results are no guarantee of future results. StockMarketScience is for information and opinion only, and should not be considered stock or market advice. The user is totally responsible for any actions taken as a result of reading this publication, and StockMarketScience assumes NO liability for any losses suffered by anyone based on anything written here.
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This site written and copyright 2002-2006 by Richard L. Field, BA, BSME, MSME, PhD. Field holds a doctorate in Mechanical Engineering (Math minor) and worked in the Space program for 20+ years before retirement. He also taught four years at Texas A&M University.
MAIL: We receive email at richard.field@stockmarketscience.com.