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Introducing The MIDAS Method of Technical Analysis Lesson 2

The Second Lesson of the Course "Introducing the MIDAS Method of Technical Analysis" by Paul Levine

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156 views

Introducing The MIDAS Method of Technical Analysis Lesson 2

The Second Lesson of the Course "Introducing the MIDAS Method of Technical Analysis" by Paul Levine

Uploaded by

King Leonidas
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Published 4/28/95
This is the second article in a series. Click here to go to the first article.

Introducing the MIDAS Method of Technical Analysis (2)


by Paul Levine
In the first article of this series we introduced the Midas chart as a new way of displaying historical price and volume
data. Containing three essenial elements: daily (average) price, a theoretical support level, and on balance volume - all
plotted vs. cumulative volume rather than time - the Midas chart provides a hitherto unavailable framework for categorizing
and in many cases understanding the dynamics of price behavior.

Specifically, in this approach, it is the price relative to the theoretical support curve that determines the degree to
which the stock or commodity is overbought or oversold. This is in contrast to the more familiar methods of technical
analysis which focus instead on price relative to moving averages, linear trendlines and/or previous tops and bottoms. The on
balance volume in turn provides a measure of the "strength" of the support curve, i.e. whether it will hold or be penetrated.

In this and future articles, we will develop these concepts by studying specific examples in detail. So let's turn first to the
Midas chart for Stone Container below. Note first how well the theoretical "primary" support level curve predicted the actual
trend reversal points. (Traditional technical analysis would have anticipated that the pullback from the peak at around 21
would be stopped at about 17 - the previous peak).

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Next note how the movement of the on balance volume to new high ground correlates with the subsequent move to
new highs in the price. This is in contrast to the second example below, Airtouch Communications, where the marked
declining trend of obv correlates with the subsequent penetration of the theoretical support level. In the absence of the obv
data, one might have expected the support level to "hold" and give rise to a new upward price leg since up to that point it had
indeed provided support just as in Stone Container.

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Returning to Stone Container, note finally that we have introduced a new feature of the Midas method: the concept of
a hierarchy of support levels. We thus speak in terms of a "primary" support and a "secondary" support. (While we have yet
to present the equations for these theoretical curves, for now we can say that both the primary and secondary support curves
are generated by the same algorithm.) Indeed, in articles to follow we will show examples of strongly trending stocks for
which one can clearly distinguish primary, secondary, tertiary and even fourth order support levels.

To introduce some Midasspeak, a Midas theorist would describe Stone Container thusly: "STO is in a primary bull
move, with a thrice validated primary support level. It has currently pulled back to and is pausing at a doubly validated
secondary support. No deterioration in the upward trend of obv is yet evident, so the expectation is that the secondary will
hold and the price will resume its upward motion. If the secondary fails to hold, the price would be expected to decline at
least to the primary support level at about 17."

Even though we have only looked at three Midas charts in this and the previous article, there should already be a
change in the way we look at a conventional price vs time bar chart. One should focus on the trend reversal points and
see whether one can visualize a series of support curves to which they might correspond. To facilitate this visualization, in
the article to follow we will transform Midas charts from the cumulative volume to the time domain. In addition, since these
three examples are all in contemporary real time, we will revisit them later to see how useful the Midas framework has been
in characterizing their subsequent behavior.

Return to Investment Research

Paul Levine first became interested in technical analysis when he was a "runner" on Wall Street as a high school student.
After graduating from MIT and gaining a PhD in theoretical physics from CalTech, he took a fresh look at the problem some
thirty years ago and stumbled upon what has now evolved into the Midas method. Following retirement as Chief Scientist

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and a co-founder of Megatek Corporation in 1981, he developed further elaborations of the method and is now in his fourth
year as a professional trader. He can be reached at: [email protected] or visit the WinMidas website.

The articles published through Investment Research represent the opinions of the authors and may not be representative of
the views of other authors, or the owners and employees of Data Transfer Group. These articles are published as a public
service to provide individual investors with educational material. Nothing on these pages should be construed to be
investment advice or recommendations.

Copyright © 1995 by Paul Levine. All rights reserved.


HTML by Data Transfer Group

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