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Sunday, May 5, 2013

Adaptive Channels

I continue to study work of late Terry Laundry, and finally got to recreating of his "adaptive channels". Terry used some kind of his own formula of price channels around 55 day moving average (MA) and 39 week MA. I noticed on his plots that while upper boundary contained almost all of price tops, but lower boundary failed often and especially so during bear markets. By no means his channels are a holy grail, but they seems to be more useful for analysis than Bolinger Bands (BBands), mainly because adaptive channels don't expand hugely after big price move.
I was able to recreate something closely resembling his Adaptive Channels using Keltner Channel around 50day EMA, with boundaries of 4 times 100-period ATR on daily chart of SPX.

At the same time I wanted to continue this notion from previous post about extreme distance of price from important MA's. Here I have a percentage difference between price and 5, 50 and 200 EMA. (Note: I don't like to use exponential averages, but couldn't find an option with simple MA for this study. Besides, difference between the two is usually negligible and disappears during strong trend, like what we have now).
Visibly none of them is extreme. I think it will be worthwhile to follow 200 (plotted on bottom panel), as it picks the same extremes as 50 (2nd panel from bottom)), but with less noise. Right now its pushing 10%, which is a sufficient level for price top, like in spring and again in fall of 2012. The only danger to this analysis is that indicator can embed in 10%+ range like in early 2011 (green rectangle), and continue to hug upper envelope for weeks.

Does it mean exhaustion of prevailing trend? Time will tell

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