The Secret Science of Price and Volume ffffiirrss..iinndddd ii 1122//66//0077 99::5555::5500 PPMM Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offi ces in North America, Europe, Australia and Asia, Wiley is globally committed to developing and mar- keting print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our web site at www. WileyFinance.com. ffffiirrss..iinndddd iiii 1122//66//0077 99::5555::5533 PPMM The Secret Science of Price and Volume Techniques for Spotting Market T rends, Hot Sectors, and the Best Stocks TIMOTHY ORD John Wiley & Sons, Inc. ffffiirrss..iinndddd iiiiii 1122//66//0077 99::5555::5533 PPMM 7700++ DDVVDD’’ss FFOORR SSAALLEE && EEXXCCHHAANNGGEE wwwwww..ttrraaddeerrss--ssooffttwwaarree..ccoomm wwwwww..ffoorreexx--wwaarreezz..ccoomm wwwwww..ttrraaddiinngg--ssooffttwwaarree--ccoolllleeccttiioonn..ccoomm wwwwww..ttrraaddeessttaattiioonn--ddoowwnnllooaadd--ffrreeee..ccoomm CCoonnttaaccttss aannddrreeyybbbbrrvv@@ggmmaaiill..ccoomm aannddrreeyybbbbrrvv@@yyaannddeexx..rruu SSkkyyppee:: aannddrreeyybbbbrrvv Copyright © 2008 by Timothy Ord. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For general information on our other products and services or for technical sup- port, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more infor- mation about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Ord, Timothy, 1949- The secret science of price and volume techniques for spotting market trends, hot sectors, and the best stocks / Timothy Ord. p. cm.—(Wiley trading series) Includes index. ISBN 978-0-470-13898-4 (cloth) 1. Stocks—Prices. 2. Investments. 3. Speculation. I. Title. HG4636.O73 2008 332.63'2042—dc22 2007032150 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffffiirrss..iinndddd iivv 1122//66//0077 99::5555::5555 PPMM Contents Preface vii Dedication ix Acknowledgments x About the Author xi CHAPTER 1 My Path to Successful Trading 1 Becoming a Broker 2 First Foray into Technical Analysis 3 A “Student” of the Market 5 An Incomplete Picture 6 Understanding Market Time Frames 7 “Discovering” Wyckoff 8 Price and Volume Relationships 8 My Trading Methodology 9 CHAPTER 2 Overview of My Method 11 Time Frames and Trading 11 Taking a Top-Down Approach 12 Aligning with the Market 30 CHAPTER 3 Physics of Price and Volume Analysis 33 Determining Buy and Sell Signals Using Ord-Volume 39 The Bullish Setup 54 Conclusion 56 CHAPTER 4 Price and Volume Relationships 59 Volume Analysis at Swings 60 Trading Gaps with Volume Comparisons 79 v ffttoocc..iinndddd vv 1122//77//0077 77::2255::5588 PPMM vi CONTENTS CHAPTER 5 Combining Ord-Volume with Swing Price and Volume Relationships 87 Combining Ord-Volume and Volume Relationships 88 Understanding Volume Pushing Price and Time Frames 95 Using Longer and Shorter Chart Time Frames 103 Summing It Up: Swing Price, Volume and Ord-Volume 104 CHAPTER 6 The “Wind at Your Back” Method 107 Finding Market Direction 107 Breadth Analysis 109 Volume Analysis 120 Momentum Analysis 125 CHAPTER 7 Sector Analysis and Stock Analysis: The Importance of Sentiment 135 Sector and Stock Analysis 136 Investor Sentiment Helps Pick Market Turns 145 Summing It Up: The Consensus of Indicators 154 CHAPTER 8 Gold Stocks: The Big Picture 157 Reading the Price Relative to Gold Ratio (PRTG) 158 Elliott Wave Analysis in Gold 160 Using “Third Time Up” and Volume Analysis 162 Applying Breakout Analysis 163 What Lies Ahead for Gold 165 Concluding the Gold Discussion 165 CHAPTER 9 Putting it All Together 167 Step 1: Reading Market Sentiment 168 Step 2: Evaluating Breadth, Volume, and Momentum 172 Step 3: Picking the Strongest Sectors 183 Step 4: Selecting the Strongest Stocks 185 Putting It All Together 190 Index 193 ffttoocc..iinndddd vvii 1122//77//0077 77::2255::5599 PPMM Preface I always had a fascination for numbers, and I graduated from the U niversity of Nebraska with a teaching degree in mathematics. When I changed careers (as I will relate in Chapter 1), I became a stock- broker in the late 1970s. The brokerage fi rm I worked for believed in fundamentals only. When it came to the stock price moving up or down, they thought it was only due to the balance sheets, earnings, manage- ment, and so forth. Because of this belief, the brokerage company had an extensive fundamental research department that gave its opinions on numerous stocks. One particular time I remember well, the research department had a long-term bearish view of Teledyne Technologies. At the time, Teledyne had been gradually moving down for several months. I showed this report to one of my clients who owned that stock. Because of this bearish fun- damental report, my client sold his shares. Just days after the client sold, shares of Teledyne started a rally that would continue for more than a year, resulting in a gain of over 300 percent. How had the fundamental research department been so wrong? I knew the brokerage fi rm stressed fundamentals, which they believed was the only way to pick stocks. As far as they were concerned, techni- cal analysis was only for witchdoctors and sorcerers, who would take bones out of a pouch and throw them on the ground and then pick stocks depending on the way the bones fell. When I studied my fi rm’s fundamen- tal researcher reports for a while, however, I found that a lot of times they were 180 degrees off the true trend of the stock. I became disenchanted with stock picking based on fundamentals and started to turn my atten- tion to technical analysis for choosing stocks. To this day, I don’t like to hear the word fundamental, because I know now that fundamentally stocks appear the worst at their bottoms and best at their tops. About this time, I started to read market letters by Joe Granville and Stan Weinstein, who were two leading market technicians at the time. Now these guys had something I could wrap my mind around! It was all about numbers when it came to fi nding market direction and stock picking. With my mathematics degree, I know that numbers are what we can use to vii ffpprreeff..iinndddd vviiii 1122//66//0077 99::5566::4400 PPMM viii PREFACE prove facts or deny a fallacy. To me, fundamental research is nothing more than opinion, which I see as the downfall of that type of analysis. After I moved to Colorado around 1980 I started to work for a brokerage company that appreciated my work in technical analysis. I was still in the early learning stages of becoming a technician; nonetheless, I was probably the best technician at that fi rm at the time. In these early years I developed a tick index trading method that worked well in picking short-term tops and bottoms in the market. I used this method to trade puts and calls on the OEX (S&P 100 Index) as well as to time trades in options on stocks. My business grew in option trading, and the fi rm I was working for made me the option principal and vice president. In 1989 and the early 1990s, I wrote a couple of articles about the tick index trading method for Stock & Commodities magazine. The short-term tick index method is still being used today by traders and has stood the test of time. By the late 1980s, I had reached a level where I was fairly effi cient in trading. I had also started my own market letter called The Ord Oracle. At times, I would go for months with hardly a losing trade, and at other times, I would struggle. What I did not understand at the time was that short-term trading works well if the trend is in your favor, but not so well if it is not. This little bit of knowledge took several more years to realize. By the mid- 1990s, it had become very clear to me that to be successful in the market a high percentage of the time, a trader must know what direction the general market was heading and then trade that direction. Thinking back on my trad- ing career, I would have saved lots of time, energy, and money if I had known this simple step in trading. There are probably thousands of trading methods out there, and most will work just fi ne if they are aligned with the market. Throughout this book, I will cover simple techniques—the types that make you slap your palm to your forehead and say, “I should have thought of that!” As you will read, many of the techniques presented in this book involve a common-sense approach to market timing and trading. (One of my more important techniques is the “Wind at Your Back” method of making sure you are aligned with the overall trend of the market.) I also present a new trading technique for stock and indexes that involves price and volume, which I named Ord-Volume. I believe traders will fi nd it interesting. The most diffi cult thing I ask traders to do is have patience, to wait for the trade to be aligned with the market. If a trader can master patience, then he or she will be more likely to have great success in the markets. I had to learn patience myself, and often I was taught that lesson the hard way. My goal in this book is to help traders shorten their learning curves in order to become more successful in the market. TIMOTHY G. ORD The Ord Oracle www.Ord-Oracle.com ffpprreeff..iinndddd vviiiiii 1122//66//0077 99::5566::4400 PPMM