Market analysis, insights and trading ideas on various markets and products!

The Synapse Network

What are Oscillators & Momentum Indicators?

An oscillator is a technical analysis tool used by traders to identify short-term overbought or oversold conditions in the market. By fluctuating between two extreme values, the oscillator helps in determining potential reversal points in price, especially in a sideways or range-bound market.

Key Features of Oscillators

  • Momentum Indicators: Oscillators are bounded momentum indicators that provide signals based on their position within an established range.
  • Overbought/Oversold Signals: When an oscillator reaches the upper extreme of its range, the asset is considered overbought, suggesting a potential sell signal. Conversely, when the oscillator reaches the lower extreme, the asset is considered oversold, indicating a potential buy signal.
  • Combination with Other Indicators: Oscillators are often used alongside other indicators, such as moving averages, to confirm signals and enhance the reliability of trend breakouts or reversals.

How Oscillators Work

Oscillators are particularly useful when a clear trend is not evident in the price action, such as in a sideways or range-bound market. The most common types of oscillators include:

  • Stochastic Oscillator
  • Relative Strength Index (RSI)
  • Rate of Change (ROC)
  • Money Flow Index (MFI)

Mechanics of an Oscillator

  1. Percentage Scale: Oscillators are typically measured on a percentage scale, often from 0 to 100. The position of the oscillator is based on the asset’s closing price relative to its price range over a specified period.
  2. Overbought and Oversold Conditions:
    • An oscillator reading above 70-80% typically indicates an overbought condition, signaling a potential selling opportunity.
    • A reading below 30-20% indicates an oversold condition, signaling a potential buying opportunity.

Application and Limitations

  • Range-Bound Markets: Oscillators are most effective in non-trending markets, where they help traders take advantage of price oscillations within a defined range.
  • Price Breakouts: When a breakout occurs, the oscillator may remain in the overbought or oversold zone for an extended period, making the signals less reliable during trending markets.

Concluding Thoughts

Oscillators are powerful tools for traders, especially in identifying short-term reversals in range-bound markets. However, they are most effective when used in conjunction with other technical indicators that can confirm whether the market is trending or not. By understanding the strengths and limitations of oscillators, traders can better navigate market conditions and improve their decision-making processes.

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The Synapse Network

Price Rate Of Change (ROC) Indicator

The Price Rate of Change (ROC) is a momentum-based technical indicator that measures the percentage change in an asset’s price between the current price and the price from a specified number of periods ago.

This indicator helps traders identify the strength of a price trend and potential reversal points by plotting the ROC against a zero line.

Key Features of the Price ROC Indicator

  • Momentum Indicator: The ROC shows the velocity of price movements by comparing the current price to the price “n” periods ago.
  • Zero Line: The ROC oscillates around a zero line, where positive values indicate upward momentum, and negative values indicate downward momentum.
  • Versatility: The ROC is used to spot divergences, overbought and oversold conditions, and centerline crossovers, which can signal potential trend changes.

Formula for the Price ROC Indicator

Price ROC=(Current Price−Price n periods agoPrice n periods ago)×100\text{Price ROC} = \left(\frac{\text{Current Price} – \text{Price } n \text{ periods ago}}{\text{Price } n \text{ periods ago}}\right) \times 100

How to Calculate the Price ROC

  1. Select the “n” Value: Determine the number of periods to compare, such as 9 for short-term analysis or 200 for long-term analysis.
  2. Find Recent Closing Prices: Identify the current closing price and the closing price from “n” periods ago.
  3. Apply the Formula: Plug the prices into the ROC formula to calculate the indicator value.
  4. Monitor and Update: As new periods close, recalculate the ROC to reflect current price momentum.

Interpretation of the Price ROC Indicator

  • Positive ROC: Indicates upward momentum, suggesting that prices are increasing compared to the past.
  • Negative ROC: Indicates downward momentum, suggesting that prices are decreasing compared to the past.
  • Zero-Line Crossover: When the ROC crosses above zero, it may signal a bullish trend, and crossing below zero may indicate a bearish trend.

Applications

  • Divergence: ROC divergence occurs when the price moves in one direction while the ROC moves in the opposite direction, signaling a potential trend reversal.
  • Overbought/Oversold Conditions: Traders monitor extreme ROC values to identify potential overbought or oversold conditions, often leading to price reversals.

Price ROC vs. Momentum Indicator

  • ROC: Divides the price difference by the price “n” periods ago to express the change as a percentage.
  • Momentum Indicator: Often multiplies the price difference by 100 or compares the current price to the price “n” periods ago without converting the result into a percentage. Both indicators convey similar information, though the ROC’s percentage format offers a slightly different perspective.

Limitations of the Price ROC Indicator

  • Whipsaws: The ROC can produce false signals, particularly around the zero line, during periods of price consolidation.
  • Early Divergence Signals: ROC divergence can occur well before an actual trend reversal, making it less reliable as a standalone trade signal.
  • Equal Weighting: The ROC gives equal importance to recent and past prices, which might not always reflect the most accurate picture of current market conditions.

Concluding Thoughts

The Price ROC indicator is a versatile tool for measuring price momentum and identifying potential trend reversals. However, its tendency to produce false signals during consolidations and early divergence warnings means it should be used in conjunction with other technical analysis tools for more reliable trading decisions. By understanding its mechanics and limitations, traders can better utilize the ROC to enhance their market analysis.

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The Synapse Network

Parabolic Stop and Reversal (PSAR) Indicator

The Parabolic SAR (Stop and Reverse) is a technical indicator developed by J. Wells Wilder, used by traders to identify potential trend reversals and to determine suitable entry and exit points in the market. The indicator is visually represented on a price chart as a series of dots, either above or below the asset’s price, which helps traders quickly assess the current trend direction.

Key Features of the Parabolic SAR:

  • Trend Direction: If the dots are below the price, the market is in an uptrend. Conversely, if the dots are above the price, the market is in a downtrend.
  • Reversal Signals: A reversal signal occurs when the dots switch sides (e.g., from below to above the price), indicating a potential change in trend direction. However, this signal doesn’t guarantee an actual price reversal; it only shows that the price has crossed the indicator line.

Formula for the Parabolic SAR:

The Parabolic SAR formula differs slightly depending on whether the trend is rising or falling:

  • Rising SAR (RPSAR): RPSAR=Prior PSAR+[Prior AF×(Prior EP−Prior PSAR)]\text{RPSAR} = \text{Prior PSAR} + [\text{Prior AF} \times (\text{Prior EP} – \text{Prior PSAR})]
  • Falling SAR (FPSAR): FPSAR=Prior PSAR−[Prior AF×(Prior PSAR−Prior EP)]\text{FPSAR} = \text{Prior PSAR} – [\text{Prior AF} \times (\text{Prior PSAR} – \text{Prior EP})]

Where:

  • AF (Acceleration Factor): Starts at 0.02 and increases by 0.02 up to a maximum of 0.2 each time the extreme point (EP) makes a new high (for rising SAR) or low (for falling SAR).
  • EP (Extreme Point): The highest high in an uptrend or the lowest low in a downtrend.

Calculation Steps:

  1. Monitor price for at least five periods, recording the highs and lows (EPs).
  2. Determine if the trend is rising or falling, and use the corresponding SAR formula.
  3. Set the initial AF at 0.02 and adjust as new EPs are recorded.

Interpretation:

  • Buy/Sell Signals: Generated when the SAR dots flip from above to below the price or vice versa. A flip below the price indicates a buy signal, while a flip above the price indicates a sell signal.
  • Trailing Stops: The SAR can also be used as a trailing stop loss to protect profits in a trending market.

Limitations:

  • Constant Signal Generation: The Parabolic SAR always generates signals, which may lead to false signals in a sideways or range-bound market.
  • Reversal Signals: These may occur even without an actual price reversal, as the SAR line catches up with the price due to the acceleration factor.

Comparing Parabolic SAR with Moving Averages:

While both the Parabolic SAR and Moving Averages (MA) are trend-following indicators, they differ in calculation and use:

  • MA: Smooths out price data over a period to show the average trend.
  • PSAR: Uses extreme points and an acceleration factor, making it more sensitive to price changes and potentially more responsive in trending markets.

Concluding Thoughts:

The Parabolic SAR is a useful tool for identifying trends and potential reversals, especially in trending markets. However, it is most effective when combined with other indicators, like the ADX or moving averages, to confirm signals and reduce the risk of false reversals in non-trending markets. Understanding its limitations and strengths allows traders to make more informed decisions and better manage their trades.

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The Synapse Network

Average Directional Index (ADX) Indicator

The Average Directional Index (ADX) is a technical analysis indicator used by traders to gauge the strength of a trend, regardless of its direction.

The ADX is often accompanied by two other indicators, the Negative Directional Indicator (-DI) and the Positive Directional Indicator (+DI), which together help traders determine whether to go long, short, or avoid trading altogether.

Understanding the ADX Calculation

Calculating the ADX involves a series of steps due to the presence of multiple lines in the indicator. The steps are as follows:

  1. Calculate +DM, -DM, and True Range (TR) for each period:
    • +DM = Current High – Previous High
    • -DM = Previous Low – Current Low
    • TR is the greater of the current high minus the current low, current high minus the previous close, or current low minus the previous close.
  2. Smooth the 14-period averages of +DM, -DM, and TR:
    • The smoothing process involves summing up the first 14 TR readings and then updating them with new TR values while dropping the oldest.
  3. Calculate +DI and -DI:
    • +DI = (Smoothed +DM / Smoothed TR) * 100
    • -DI = (Smoothed -DM / Smoothed TR) * 100
  4. Determine the Directional Movement Index (DMI):
    • DMI = (| +DI – -DI | / | +DI + -DI |) * 100
  5. Calculate the ADX:
    • The ADX is calculated by smoothing the DX values over a set number of periods, typically 14.

Interpreting the ADX

The ADX, along with the +DI and -DI, provides traders with essential information about the trend strength and direction:

  • Strong Trend: An ADX above 25 indicates a strong trend, which could be either upward or downward.
  • Weak or Non-Trending Market: An ADX below 20 suggests a weak trend or a market that is trendless.
  • Trade Signals: Crossovers between the +DI and -DI lines can signal potential trading opportunities. For example, if +DI crosses above -DI and the ADX is above 25, it may be a buy signal. Conversely, if -DI crosses above +DI under the same conditions, it may signal a short trade.

ADX vs. The Aroon Indicator

While the ADX indicator includes three lines (+DI, -DI, and ADX), the Aroon indicator consists of only two.

Both indicators aim to identify trend direction and strength, but they use different calculations, which may result in different crossover signals.

Limitations of the ADX

The ADX can produce frequent crossovers, leading to potential confusion or losses if trades are entered based on false signals.

These are particularly common when the ADX is below 25.

To mitigate these issues, the ADX is best used alongside other technical indicators and price analysis.

FAQs

  • What is a good ADX value? An ADX above 25 is generally considered strong, indicating a significant trend. Below 20, the trend is weak or non-existent.
  • Is the ADX a good indicator? Yes, particularly when combined with price action analysis and other indicators, the ADX can effectively measure trend strength and direction.
  • What indicators work well with the ADX? The Relative Strength Index (RSI) is often used with the ADX. While the ADX measures trend strength, the RSI can assist with timing entries and exits.

Concluding Thoughts

The Average Directional Index (ADX) is a valuable tool for technical traders seeking to assess the strength and direction of trends.

When used correctly, it can help traders determine whether a market is trending or ranging and guide them in selecting the appropriate trading strategy.

Although the ADX is effective on its own, combining it with other technical indicators like the RSI or moving averages can further enhance its usefulness in a trading strategy.

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Spencer Li

Weekly Market Wrap: Is Nvidia & the Tech Sector too Overbought?

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For subscribers of our “Daily Trading Signals”, we now also include a “Weekly Market Report”, where we provide a weekly deep-dive on the market, including fundamentals, technicals, economics, and portfolio management:

Click here for last week’s market report (21 August 2023)
Click here to subscribe for the latest market report (28 August 2023)
Click here to see the archives of all our past market reports

Market Recap & Upcoming Week

Last week witnessed significant developments in the tech industry, particularly surrounding Nvidia. The company, known for its pioneering role in AI technology, had earlier set the stage with an impressive revenue forecast that captured Wall Street’s attention.

With heavyweights like Microsoft and Alphabet backing AI’s potential, Nvidia’s anticipation of its Q2 results became a major focal point. As the tech juggernaut predicted sales of $12.4 billion for the quarter, all eyes were on them to see if they could live up to this forecast amidst challenges like potential GPU shortages and market shifts.

Moreover, the AI-driven surge that Nvidia demonstrated truly paid dividends. They announced a staggering $13.5 billion revenue for the fiscal second quarter, primarily driven by the increasing demand for their latest AI chips. This robust performance not only exceeded expectations but also elevated the firm beyond the coveted $1 trillion valuation threshold.

Their stronghold in the data center space has, however, garnered attention from competitors. Nvidia’s unprecedented success now faces challenges from rivals like Advanced Micro Devices, while tech behemoths like Google and Amazon are considering their own chip solutions.

In the upcoming week, financial enthusiasts should keep a keen eye on the U.S. market landscape, focusing especially on pivotal indicators such as inflation, jobs, and home prices.

Key corporate results from giants such as Pinduoduo, Hewlett Packard, Best Buy, Salesforce, and others will roll out, potentially offering a fresh perspective on market dynamics.

On the data front, the JOLTS report on Tuesday, ADP’s Employment Report on Wednesday, and the significant nonfarm payrolls report on Friday are set to provide insights into the U.S. employment scenario.

Furthermore, with the release of the Case-Shiller National Home Price Index and the BEA’s PCE Price Index, market participants will gain clarity on the housing sector and the inflationary trajectory—two crucial components that heavily influence the Fed’s policy decisions.

 

Daily Trading Signals (Highlights)

We cover 3 main markets with a total of 200+ counters, so we will never run out of trading opportunities:

By covering a broad range of markets, we can focus our attention (and capital) on whichever market currently gives the best returns.

Subscribe for real-time alerts and weekly reports:
👉🏻 https://synapsetrading.com/daily-trading-signals

 

 

Trading Signals USDSGD 240823

USDSGD – Looks like the trading range is still intact, after prices failed to break out of the range to the upside.

 

Trading Signals US100 240823

NASDAQ 100 (US100) – The pullback (~9%) might be over, good chance of prices heading to test prior highs.

 

Trading Signals XAUUSD 240823

Gold (XAUUSD) – Low risk buying opportunity after a long pullback.

 

Trading Signals BTCUSD 240823

Bitcoin (BTCUSD) – RSI extremely oversold, good chance of a bullish rebound.

 

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