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Developed by Paul Dysart in the 1930s, Negative Volume Index or NVI is a cumulative indicator that depicts how price movements are affected from down volume days through the technical indication line that integrates volume and price to graphically.
Darvas Box system Every great trader/investor in the history of the markets had a specific method to approach the markets, which eventually led them to create a good fortune, Darvas Box system is one such method. It is a trend following strategy developed by Nicholas Darvas in the 1950s to identify stocks for good upside potential. This is one of the few methods to trade the markets which uses the combination of both the technical analysis and fundamental analysis for a much more refined decision. The fundamentals were used to identify the stocks, and technical analysis was used to time the entry and exits. Who was Nicholas Darvas? Nicholas Darvas was arguably one of the greatest stock traders/investors during 1950s – 1960s, but surprisingly he was a ball dancer by profession and not a professional stock trader. Even while trading and building his fortune, he was on a world tour for his performances in many countries and took up trading as a part-time job. In November 1952 he was invited to a Toronto Nightclub for which he received an unusual proposition of getting paid in shares by the club owners. At that time, all he knew was there is something called stocks which moves up and down in value, that’s it. He accepted the offer and received 6k shares of a Canadian mining company Brilund at 60 cents per share, with the condition that if the stock falls below this price within six months, then the owners would make up the difference. This was the introduction of a professional ball dancer to the stock market. Nicholas Darvas couldn’t perform at the club, so he bought those shares as a gesture. Within two months, Brilund touched $1.9, and his initial investment of $3000 turned to $11400, netting in almost three times of his investment. This triggered a curiosity into the stock markets, and he started to explore trading. Origin of the Darvas Box theory Initially, he was trading on his broker’s recommendation, tips from wealthy businessmen, he even approached some advisory services or any source that he could get his hands on for the tips, but all led him to losses. After losing a lot of money, he decided to develop his own theory, and after a lot of trial and error, his observations and continuous refinements he eventually invented his theory “The Box Theory”. So what exactly is the Box Theory? Fundamentals Analysis As stated earlier, the box theory uses a judicious bend of both the technical and fundamentals. Darvas believed that in order to spot a good stock or even a multibagger, there should be something brewing up in the respective sector as a whole or some major fundamental change in that specific company. Generally, the fundamentals that Darvas used to study were on a broader sector level, and not the company-specific fundamentals. Even for the specific company Darvas used to look from a general perspective like, is the company launching a new product which could be a blockbuster hit. He completely refrained from looking at numbers and financial statements as his initial experiment with ratios and financial statements didn’t yield any good result. To know more on the three financial statements read: Income Statement (P&L) Balance Sheet Cash Flow Statement Technical Analysis Darvas was a big believer in price action and volume of the stock. He believed if some major fundamental changes were to take place in a company, this soon shows up in the stock price and its volume of trading as more people get interested in buying or selling the stock. With his observations here realized by just observing the price action, he can participate in the rally which gets triggered by some major fundamental development without actually knowing about the change. Using the box theory, Darvas used to scan stocks based on rising volume as he needed mass participation in the rally. Also, he only picked up those stocks that were already rising. His theory is all about “buy high, sell higher” instead of the conventional belief of “buy low, sell high”. After the stock satisfies both the parameters of increasing price and volume with major underlying fundamental change, Darvas looks to enter the stock. Good read on momentum trading. How and where to enter? Major part of the box theory is based on entry and exit levels. To enter a stock, Darvas looked for a consolidation phase preceded by a rally. A consolidation phase is the price action wherein the price moves up and down in a tight range, that is, a non-directional move. He would then mark the high and low of the consolidation phase with the horizontal line, essentially making it a box-like structure, hence the name “Box Theory”. The high point is called the ceiling, and low is called the floor. Whenever the stocks break above the ceiling, Darvas would look to buy one tick above the ceiling with one tick below floor as a stop-loss point. Pyramiding Darvas discovered early on, in order to become successful in the market your winning bets should yield much more profit than the loss in the losing bets. This led him to do pyramiding in his winning trade, which is clearly defined in the box theory. Pyramiding means to increase the existing position if the stock is going in the favour, which leads to a much higher profit in the winning trades. According to the box theory, the repetition of the entry criterion is the new signal for adding onto the existing position. In other words, after a position, if the stocks stage the same setup, that is, a consolidation after a rally, then the break above the ceiling of this new box would signal to increase position with the revised stop loss of 1 tick below the new floor. In any case, whenever the stock falls below the current floor, the entire position would we sold off at once. This is the only exit condition in the box theory, and there is no method of booking profit upfront as Darvas believed in holding on to a rising stock. The only way to book profit is to let the stock to take out the revised stop loss.
Dead Cat Bounce Dead Cat bounce is a colloquial phrase which is quite popular in the financial markets. The term was coined a long time ago and generally referred to the peculiar behaviour of the price. The phrase denotes a recovery in the asset’s price, often a sharp one after a prolonged downtrend. Sometimes it is also referred to a short but sharp fall, succeeded by an equally sharp recovery. How does a downtrend continue for a long time? Quite often, some securities in the financial markets depict a very long downtrend which may last from a few months to a few years depending on the severity of the fundamental headwinds. These prolonged downtrends are so strong that no support levels can withhold the downtrend and the prices keep on falling. Every support level gets taken out by excessive selling, which pushes the prices even lower. These lower prices force the long holders to liquidate their positions as no visible halt in the downtrend is noticed. This liquidation from existing buyers further fuels the selling, leading to the continuation of the downtrend. As the price keeps on falling, the buyers do not get enough confidence to buy and consequently keep getting overpowered by selling pressure continues the downtrend. So what is the ideology behind “Dead Cat Bounce”? In due course of a downtrend, the security tends to become oversold for the time being. Oversold is a technical term is used for security which seems to have fallen quite a bit in a specified period. In other words, a security that has been continually sold in a specified period tends to reach a level wherein the sellers are no more interested in selling at further lower rates. This is where the buyers’ step in and try to buy these stocks at low prices, leading to an increase in demand over the supply. This fresh buying tends to push the price up hence resulting in a short upside movement or, in technical parlance a “Bounce”. This point is where the downtrend witnesses a temporary upside momentum which is exactly quoted as a “Dead Cat Bounce”. The ideology is “Even a dead cat will bounce if fallen from a great height.” Likewise, a short bounce is quite expected after a prolonged downtrend which does not change the trend as a bounce does not mean the cat has become alive. Image Source ©Kalkine Group Does it signify a reversal from a downtrend? A Dead Cat bounce is an upside momentum, witnessed after a prolonged downward trend, generally near the oversold price region. But it is to be noted that this price bounce is merely a reaction of the downtrend which is often witnessed in the oversold areas. This does not change the entire trend, and more often than not, the trend continues in the primary direction after the bounce fizzles out. Why is it difficult to trade a Dead Cat Bounce? Most of the time it is difficult to trade a move like a Dead Cat Bounce as the bounce is often very quick and short-lived. The overall trend remains negative, which is in contradictory to the short-term bounce. Also, few investors mistake it for the trend change, which often proves to be a mistake. It generally becomes difficult to estimate some key support areas from where the bounce may occur as the downtrend is quite strong and lacks demand to support the price. However, there are some momentum indicators like RSI (Relative Strength Index), Stochastics oscillator etc. which may help to gauge oversold zones from where the bounce may occur. What are the reasons for a Dead Cat Bounce? There could be many reasons for a Dead Cat Bounce to occur on the charts as the sudden demand may come due to numerous reasons. Some of the reasons are Oversold Price As discussed, due to a prolonged downtrend and continued selling the price often comes to a level wherein the sellers are no more interested in selling at these lower prices and at the same time buyers often find a value proposition. This leads to a spike in demand, which ultimately results in a Dead Cat Bounce. Strong support area There are some levels of support on the price chart that are quite prominent. In other words, there are some regions of support which are quite strong and may remain relevant for years. These support levels are generally hard to break at the first attempt, which results in a bounce or a complete reversal. How to profit from a Dead Cat Bounce There are two different strategies when it comes to trading these kinds of sharp and against the trend moves. They are contradictory to each other, but both are based on proven price behaviour. Short Selling the rally As the primary trend of the underlying is still downward, one thought arises to go short on the bounce. This strategy one to participate in the downtrend but with a much better price. If these rallies are met with a resistance level like a falling trendline, horizontal price resistance etc. then these areas are ideal to sell the bounce in a downtrend. Buying into the rally Another opinion arises, why not to participate in the bounce? This strategy can also be fruitful provided the bounce should be stronger and last for a while, which is not always the case. This essentially calls for a very quick decision making while capitalising on the temporary bounce. Bottomline A Dead Cat Bounce is a prolonged downtrend followed by a short-term bounce. These bounces generally don’t last long, and once they fade, the trend continues towards the south. However, sometimes a bounce may also act as a reversal, but for the added confirmation a trader should also look at other signals of a reversal like bullish divergence at the bottom or a double bottom chart pattern.
An earnings announcement is a public statement of a company’s earnings, usually done on a periodic basis. These official announcements are released quarterly or yearly to inform the investors and the market about a company’s financial performance. Companies announce their financial reports through press releases on their websites and list them on the stock exchanges website. After the information is released through a conference call, there is a question-and-answer round with the senior management in which analysts, media, and investors can participate. On the basis of the report, analysts then incorporate earning measures such as EPS (Earning Per Share). These reports help investors in making sound investment decisions. Earnings results are announced during the earnings season on a date chosen by the company. Stock prices of the companies take a swing before and after the company releases its earnings report. Equity analysts also predict earnings estimates through their analysis which drives stock prices movement due to speculations. Stock prices even move after the earning results are declared, up or down, depending on how the results have turned out. Source: Copyright © 2021 Kalkine Media Pty Ltd. When are earning announcements made? It is mandatory for every listed company to report its quarterly financial results in the US but not in Australia. In Australia, companies release their financial report on a semi-annual basis. Having said that, many Australian companies also update their shareholders quarterly, but these are not considered official earnings. These quarterly reports are released to satisfy the market demand for information and to disclose the company’s guidance on its performance. The financial calendar varies from country to country and therefore, the earnings season changes as well. In the US, the earnings season starts after the final month of the financial quarter. Usually, American companies start posting their earnings reports in January, April, July, and October. In Australia, companies report twice a year, usually around February and August, or May and October. It depends upon the company’s financial cycle. However, whether quarterly in the US or semi-annually in Australia, these earnings results are required as agreed while listing the company with the stock exchanges. Source: Copyright © 2021 Kalkine Media Pty Ltd. Why are earnings announcements necessary? Financial results help investors, media, and other stakeholders of the company to have a greater understanding of the company’s financial footing. Companies not just provide sales, operating profit, net profits, but also offer guidance and outlook for coming months. Additionally, these reports also have senior management statements directed at the market. Therefore, earning announcements act as an informative document for the investors and analysts to study and gauge a company’s performance. Analysts can provide earnings estimates, and investors can then take wise investment decisions. These documents are also vital for companies when it comes to seeking funding for the business. Financial institutions can also judge a company’s financial health by evaluating earnings reports. The management offers insights on growth drivers, risk factors, etc that impacted the earnings during that particular period. Analysts also assess the earnings results, taking into account the external factors that drove the growth or impacted the firm negatively. These factors could be mergers and acquisitions, bankruptcies, economic discrepancies, policy changes, etc. For investors, earnings reports are essential because these announcements swing the price up or down. Traders keep a keen eye on these reports as it can be a time when they can confirm positions. However, some investors also avoid earnings seasons because of the involvement of various human factors.
A renowned economic theory, J Curves reflects upon a few assumptions and asserts that a nation's trade deficit will originally fall post currency depreciation. This is catalysed by greater prices on imports which will ideally exceed decreased volume of the country?s imports.