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The Force Index can be used in conjunction with a trend following indicator to identify short-term corrections within that trend. A pullback from overbought levels represents a short-term correction within an uptrend. An oversold bounce represents a short-term correction within a downtrend. Yes, corrections can be up or down, depending on the direction of the bigger trend. Alexander Elder recommends using a 22-day EMA for trend identification and a 2-day Force Index to identify corrections. The trend is up when the 22-day EMA is moving higher, which means the 2-day Force Index would be used to identify short-term pullbacks for buying. The trend is down when the 22-day EMA is moving lower, which means the 2-day Force Index would be used to identify short-term bounces for selling. This is an aggressive strategy best suited for active traders. The timeframe can be adjusted by using a longer moving average and timeframe for the Force Index. For example, medium-term traders might experiment with a 100-day EMA and 10-day Force Index. There are two schools of thought regarding the correction play. Traders can either act as soon as the correction is evident or act when there is evidence the correction has ended. Let's look at an example with the 22-day EMA and 2-day Force Index. Keep in mind that this is designed to identify very short corrections within a bigger trend. The chart below shows Texas Instruments (TXN) with the 22-day EMA turning up in mid-September. With the 22-day EMA rising, traders are looking for very short-term pullbacks when the 2-day Force Index turns negative. Traders can act when the Force Index turns negative or wait for it to move back into positive territory. Acting when negative may improve the reward-to-risk ratio, but the correction could extend a few more days. Waiting for the Force Index to turn positive again shows some strength that could signal the correction has ended. The green dotted lines show when the 2-day Force Index turns negative. The Force Index uses both price and volume to measure buying and selling pressure. The price portion covers the trend, while the volume portion determines the intensity. At its most basic, chartists can use a long-term Force Index to confirm the underlying trend. The bulls have the edge when the 100-day Force Index is positive. The bears have the edge when the 100-day Force Index is negative. Armed with this information, traders can then look for short-term setups in harmony with the larger trend, such as bullish setups in a larger uptrend or bearish setups within a larger downtrend. As with all indicators, traders should use the Force Index in conjunction with other indicators and analysis techniques. 1631516097-Identifying-Corrections.docx

OBV can be used to confirm a price trend, upside breakout or downside break. The chart for Best Buy (BBY) shows three confirming signals as well as confirmation of the price trend. OBV and BBY moved lower in December-January, higher from March to April, lower from May to August and higher from September to October. The trends in OBV matched the trend in BBY. OBV also confirmed trend reversals in BBY. Notice how BBY broke its downtrend line in late February and OBV confirmed with a resistance breakout in March. BBY broke its uptrend line in late April and OBV confirmed with a support break in early May. BBY broke its downtrend line in early September and OBV confirmed with a trend line break a week later. These coincident signals indicated that positive and negative volume were in harmony with price. Sometimes OBV moves step-for-step with the underlying security. In this case, OBV is confirming the strength of the underlying trend, be it down or up. The chart for Autozone (AZO) shows prices as a black line and OBV as a pink line. Both moved steadily higher from November 2009 until October 2010. Positive volume remained strong throughout the advance. On Balance Volume (OBV) is a simple indicator that uses volume and price to measure buying pressure and selling pressure. Buying pressure is evident when positive volume exceeds negative volume and the OBV line rises. Selling pressure is present when negative volume exceeds positive volume and the OBV line falls. Chartists can use OBV to confirm the underlying trend or look for divergences that may foreshadow a price change. As with all indicators, it is important to use OBV in conjunction with other aspects of technical analysis. It is not a standalone indicator. OBV can be combined with basic pattern analysis or to confirm signals from momentum oscillators. 1631516097-Trend-Confirmation.docx

RSI is a versatile momentum oscillator that has stood the test of time. Despite changes in volatility and the markets over the years, RSI remains as relevant now as it was in Wilder's days. While Wilder's original interpretations are useful to understanding the indicator, the work of Brown and Cardwell takes RSI interpretation to a new level. Adjusting to this level takes some rethinking on the part of the traditionally schooled chartists. Wilder considers overbought conditions ripe for a reversal, but overbought can also be a sign of strength. Bearish divergences still produce some good sell signals, but chartists must be careful in strong trends when bearish divergences are actually normal. Even though the concept of positive and negative reversals may seem to undermine Wilder's interpretation, the logic makes sense and Wilder would hardly dismiss the value of putting more emphasis on price action. Positive and negative reversals put price action of the underlying security first and the indicator second, which is the way it should be. Bearish and bullish divergences place the indicator first and price action second. By putting more emphasis on price action, the concept of positive and negative reversals challenges our thinking towards momentum oscillators. 1631516097-Relative-Strength-Index.docx

While momentum oscillators are best suited for trading ranges, they can also be used with securities that trend, provided the trend takes on a zigzag format. Pullbacks are part of uptrends that zigzag higher. Bounces are part of downtrends that zigzag lower. In this regard, the Stochastic Oscillator can be used to identify opportunities in harmony with the bigger trend. The indicator can also be used to identify turns near support or resistance. Should a security trade near support with an oversold Stochastic Oscillator, look for a break above 20 to signal an upturn and successful support test. Conversely, should a security trade near resistance with an overbought Stochastic Oscillator, look for a break below 80 to signal a downturn and resistance failure. The settings on the Stochastic Oscillator depend on personal preferences, trading style and timeframe. A shorter look-back period will produce a choppy oscillator with many overbought and oversold readings. A longer look-back period will provide a smoother oscillator with fewer overbought and oversold readings. Like all technical indicators, it is important to use the Stochastic Oscillator in conjunction with other technical analysis tools. Volume, support/resistance and breakouts can be used to confirm or refute signals produced by the Stochastic Oscillator. 1631516097-Stochastic.docx

Directional movement can also be important when analyzing the slope. A negative and rising slope shows improvement within a downtrend. A positive and falling slope shows deterioration within an uptrend. Chart 3 shows the Nasdaq 100 ETF (QQQQ) with the 100-day Slope. A 20-day simple moving average was added to identify upturns and downturns. A Slope is rising when above its 20-day SMA and falling when below. Four key crossovers are identified on this chart (green/red arrows). Notice that the crossovers occurred before the Slope turned negative or positive. This is like a leading indication for the Slope. Also, notice the bounce after the negative cross in July 2008 and the retest after the positive cross in January 2009. These early slope reversals foreshadowed a move into positive territory or a trend change, but you should not expect an extended move after every moving average crossover. The 100-day Slope moved below its 20-day SMA in August 2009, yet QQQQ kept moving higher. A declining and positive Slope reflects less steepness in the advance. Notice how the 100-day Slope remained positive as QQQQ continued higher from September 2009 to January 2010. Trade Bias Slope alone cannot be used to participate in an ongoing trend, but it can be used with other indicators to identify potential entry points. In particular, Slope can be used for trend identification to establish a trading bias. A positive slope dictates a bullish bias, while a negative Slope dictates a bearish bias. Once a trading bias is established, a momentum oscillator can be used to identify potential entry points. The choice of momentum oscillator is really a personal preference. The example with Apple uses the 100-day Slope with 10-day Williams %R. The look-back period for the Slope should be significantly longer than the look-back period for the momentum oscillator. The Slope defines the bigger trend, while the momentum oscillator represents a subset of that trend. Chart 4 shows the 100-day Slope moving above zero in July to establish a bullish bias. Only bullish signals are considered for the momentum oscillator. These include oversold readings, centerline crossovers, or signal line crossovers. Williams %R does not have a signal line, but MACD and PPO do. The blue dotted lines show when 10-day Williams %R moves below -80% to become oversold. Notice that these readings correspond with short pullbacks in the stock. Except for the last oversold reading in early December, Apple resumed its uptrend soon after these oversold readings. Relative Strength The Slope of two (or more) securities can be compared to identify relative strength and relative weakness. The chart below shows Amazon (AMZN) with the S&P 500. Both securities are shown with the 20-day Slope (black). The blue vertical line marks a point in early November when Amazon had a positive Slope and the S&P 500 had a negative Slope. Amazon was clearly outperforming the S&P 500 at this time. In fact, when the S&P 500 bottomed in early November, Amazon led the way higher with a move from 117 to 143. Notice that Amazon moved higher even as the Slope moved lower. The Amazon Slope turned negative in mid-December and the S&P 500 Slope was still positive. This situation repeated the second week of January. Based on the Slope comparison, Amazon went from relative strength in November to relative weakness in December and January. During these two months, the 20-day linear regression for Amazon was sloping down while the 20-day linear regression for the S&P 500 was sloping up. Slope measures the rise-over-run of a linear regression. In general, an uptrend is present when Slope is positive and a downtrend exists when the slope is negative. The timeframe depends on the number of days. 10 days covers a short-term trend, 100 days a medium-term trend, and 250 days a long-term trend. As with typical trend-following indicators, Slope lags price and reverses after an actual top or bottom. This does not, however, detract from its usefulness. Trend identification and trend strength are important tools, even for traders. As with moving averages, Slope can be used with momentum indicators to participate in an ongoing trend. 1631516097-Trend-Strength.docx

Failure swings and divergences can be combined to create more robust signals. A bullish failure swing occurs when MFI becomes oversold below 20, surges above 20, holds above 20 on a pullback and then breaks above its prior reaction high. A bullish divergence forms when prices move to a lower low, but the indicator forms a higher low to show improving money flow or momentum. On the Aetna (AET) chart below, a bullish divergence and failure swing formed in January-February 2010. First, notice how the stock formed a lower low in February and MFI held well above its January low for a bullish divergence. Second, notice how MFI dipped below 20 in January, held above 20 in February and broke its prior high in late February. This signal combination foreshadowed a strong advance in March. A bearish failure swing occurs when MFI becomes overbought above 80, plunges below 80, fails to exceed 80 on a bounce and then breaks below the prior reaction low. A bearish divergence forms when the stock forges a higher high and the indicator forms a lower high, which indicates deteriorating money flow or momentum. On the Aetna chart above, a bearish divergence and failure swing formed in August-September. The stock moved to a new high in September, but MFI formed a significantly lower high. A bearish failure swing occurred as MFI became overbought above 80 in late August, failed to reach 80 with the September bounce and broke the prior lows with a decline in late September. The Money Flow Index is a rather unique indicator that combines momentum and volume with an RSI formula. RSI momentum generally favors the bulls when the indicator is above 50 and the bears when below 50. Even though MFI is considered a volume-weighted RSI, using the centerline to determine a bullish or bearish bias does not work as well. Instead, MFI is better suited to identify potential reversals with overbought/oversold levels, bullish/bearish divergences and bullish/bearish failure swings. As with all indicators, MFI should not be used by itself. A pure momentum oscillator, such as RSI, or pattern analysis can be combined with MFI to increase signal robustness. 1631516062-Divergences-and-Failures.docx

Measuring overbought and oversold conditions can be tricky with Price Channels. Securities can become overbought and remain overbought in a strong uptrend. Similarly, securities can become oversold and remain oversold in a strong downtrend. In a strong uptrend, prices can move above the upper channel line and continue above the upper channel line. In fact, the upper channel trend line will rise as price continues above the upper channel. This may seem technically overbought, but it is a sign of strength to remain overbought. Similarly, the Stochastic Oscillator can move above 80, which is technically overbought, and remain overbought for an extended period. Successful use of overbought and oversold levels depends on successful trend identification. Once a bigger uptrend has been identified, traders can look for oversold levels in the smaller trend. Short-term oversold levels occur after a pullback within a bigger uptrend. As noted above, the weekly charts turned bullish when QQQQ surged above the upper channel line. Once the weekly chart is bullish, traders can turn to the daily chart to look for oversold signals. The weekly chart represents the bigger trend, while the daily chart represents the smaller trend. The chart above shows daily prices for QQQQ. The bigger trend (weekly chart) is up so we would be looking for pullbacks on the daily chart. The green arrows show when QQQQ dipped below the 20-day Price Channel. There were two good signals in early July and early November. There were three touches in January-February. The first two signals were “early”, while the February signal was a direct hit. Inverse logic can be applied in downtrends. A weekly downtrend starts with a plunge below the lower channel line. Once this downtrend is established, chartists can turn to the daily chart to look for overbought signals. Overbought signals occur after a bounce within a bigger downtrend. Downtrends tend to be faster than uptrends. This means overbought readings may not occur during a strong or fast downtrend. Chartists may then need to tweak the Price Channel settings or use the centerline for signals. Prices are more likely to touch the centerline than the upper channel line. Price Channels tells us when a security reaches an xx-period high or an xx-period low. 20-day Price Channels mark the 20-day high-low range, 10-week Price Channels mark the 10-week high-low range. The centerline marks the midpoint. Securities that continuously exceed the upper channel line show strength. After all, it takes strong buying pressure to forge higher highs. Conversely, securities that continuously break the lower channel line show weakness. Strong selling pressure is evident with lower lows. Using Price Channels, chartists can determine the dominant force, buying pressure or selling pressure. As with all indicators, it is important to use other analysis techniques to confirm or refute the Price Channels. Chartists can use chart patterns, indicators or basic chart analysis to complement Price Channels. 1631516062-Overbought.docx

The Aroon indicators signal a consolidation when both are below 50 and/or both are moving lower with parallel lines. It makes sense that consistent readings below 50 are indicative of flat trading. For 25-day Aroon, readings below 50 mean a 25-day high or low has not been recorded in 13 or more days. Prices are clearly flat when not recording new highs or new lows. Similarly, a consolidation is usually forming when both Aroon-Up and Aroon-Down move lower in parallel fashion and the distance between the two lines is quite small. This narrow parallel decline indicates that some sort of trading range is forming. The first Aroon indicator to break above 50 and hit 100 will trigger the next signal. The chart above shows Omnicom (OMC) with the Aroon indicators moving below 50 in a parallel decline. The width of the channel could be narrower, but we can see the consolidation taking shape on the price chart for confirmation. Both Aroon-Up and Aroon-Down were below 50 in the yellow area. Aroon-Up then broke out and surged to 100, which was before the breakout. Further confirmation came with another Aroon-Up surge at the breakout point. This surge/breakout signaled the end of the consolidation and the beginning of the advance. The next chart shows Lifepoint Hospitals (LPNT) with 25-day Aroon. Both lines moved lower in May with a parallel decline. The distance between the lines was around 25 points throughout the decline. Aroon-Up and Aroon-Down flattened in June and both remained below 50 for around two weeks as the triangle consolidation extended. Aroon-Down (red) was the first to make its move, with a break above 50 just before the triangle break on the price chart. Aroon-Down hit 100 as prices broke triangle support to signal a continuation lower. Aroon-Up and Aroon-Down are complementary indicators that measure the elapsed time between new x-day highs and lows, respectively. They are shown together so chartists can easily identify the stronger of the two and determine the trend bias. A surge in Aroon-Up combined with a decline in Aroon-Down signals the emergence of an uptrend. Conversely, a surge in Aroon-Down combined with a decline in Aroon-Up signals the start of a downtrend. A consolidation is present when both move lower in parallel fashion or when both remain at low levels (below 30). Chartists can use the Aroon indicators to determine if a security is trending or trading flat and then use other indicators to generate appropriate signals. For example, chartists might use a momentum oscillator to identify oversold levels when 25-week Aroon indicates that the long-term trend is up. 1631516062-Consolidation-Period.docx

The ZigZag feature can be used to filter out small moves and make Elliott Wave counts more straightforward. The chart below shows the S&P 500 ETF with a 6% ZigZag to filter moves less than 6%. After a little trial and error, 6% was deemed the threshold of importance. An advance or decline greater than 6% was deemed significant enough to warrant a wave for an Elliott count. Keep in mind that this is just an example. The threshold and the wave count are subjective and dependent on individual preferences. Based on the 6% ZigZag, a complete cycle was identified from March 2009 until July 2010. A complete cycle consists of 8 waves, 5 up and 3 down. Retracements and Projections SharpCharts users can choose between the normal “ZigZag” and “ZigZag (Retrace.).” As shown in the examples above, the normal ZigZag shows lines that move at least a specific percentage. The ZigZag (Retrace.) connects the reaction highs and lows with labels that measure the prior move. The numbers on the dotted lines reflect the difference between the current ZigZag line and the ZigZag line immediately before it. For example, the chart below shows Altera (ALTR) with the 15% ZigZag (Retrace.) feature. Three ZigZag lines have been labeled (1, 2 and 3). The dotted line connecting the low of Line 1 with the low of Line 2 shows a box with 0.638. This means Line 2 is .638 (63.8%) of Line 1. A number below 1 means the line is shorter than the prior line. The dotted line connecting the high of Line 2 with the high of Line 3 shows a box with 1.646. This means Line 3 is 1.646 (164.6%) of Line 2. A number above 1 means the line is longer than the prior line. As you may have guessed, seeing these lines as a percentage of the prior lines makes it possible to assess Fibonacci projections. The August decline (Line 2) retraced around 61.8% of the June-July advance (Line 1). This is a classic Fibonacci retracement. The advance from early September to early November was 1.646 times the August decline. In this sense, the ZigZag (Retrace.) can be used to project the length of an advance. Again, 1.646 is close to the Fibonacci 1.618, which is the Golden Ratio used in many projection estimates. See our ChartSchool article for more on Fibonacci retracements. The ZigZag and ZigZag (Retrace.) filter price action and do not have any predictive power. The ZigZag lines simply react when prices move a certain percentage. Chartists can apply an array of technical analysis tools to the ZigZag. Chartists can perform basic trend analysis by comparing reaction highs and lows. Chartists can also overlay the ZigZag feature to look for price patterns that might not be as visible on a normal bar or line chart. The ZigZag has a way of highlighting the important movements and ignoring the noise. When using the ZigZag feature, don't forget to measure the last line to determine if it is temporary or permanent. This line is temporary if the current price change is less than the ZigZag parameter, but becomes permanent if the price change is greater than or equal to the ZigZag parameter. 1631516062-Elliott-Wave-Counts.docx

Pivot Points offer chartists a methodology to determine price direction and then set support and resistance levels. Price direction is determined by looking at the current period's price action relative to the pivot point: starting above or below the pivot point, or crossing it in either direction during trading. The set support and resistance points come into play after price direction has been determined. While originally designed for floor traders, the concepts behind Pivot Points can be applied across various timeframes. As with all indicators, it is important to confirm Pivot Point signals with other aspects of technical analysis. A bearish candlestick reversal pattern could confirm a reversal at second resistance. Oversold RSI could confirm oversold conditions at second support. An upturn in MACD could be used to confirm a successful support test. On a final note, sometimes the second or third support/resistance levels are not seen on the chart. This is simply because their levels exceed the price scale on the right. In other words, they are off the chart. 1631516062-Pivot-Points.docx