Elder-ray is an indicator named for its similarity to x-rays. It shows the structure of bullish and bearish power below the surface of the markets. Elder-ray combines a trend- following moving average with two oscillators to show when to enter and exit long or short positions. A moving average reflects the average consensus of value. The high of each bar reflects the maximum power of bulls during that bar. The low of each bar marks the maximum power of bears during that bar. Elder-ray works by comparing the power of bulls and bears during each bar with the average consensus of value. Bull Power reflects the maximum power of bulls relative to the average consensus, and Bear Power the max- imum power of bears relative to that consensus. When the high of a bar is above the EMA, Bull Power is positive. When the entire bar sinks below the EMA, which happens during severe de- clines, Bull Power becomes negative. When the low of a bar is below the EMA, Bear Power is negative. When the entire bar rises above the EMA, which happens during wild rallies, Bear Power becomes positive. The slope of a moving average identifies the current trend of the mar- ket. When it rises, it shows that the crowd is becoming more bullish; it is a good time to be long. When it falls, it shows that the crowd is becoming more bearish; it is a good time to be short. Prices keep getting away from a moving average but snap back to it, as if pulled by a rubber band. Bull Power and Bear Power show the length of that rubber band. Knowing the “Buy low, sell high” sounds good, but traders and investors seem to have been more comfortable buying Lucent above 70 than below 7. Perhaps they are not as rational as the efficient market theorists would like us to believe? Elder-ray gives rational traders a glimpse into what is going on below the sur- face of the market. When the trend, identified by the 22-day EMA, is down and bulls are under water, the rallies back to the surface mark shorting opportunities normal height of Bull or Bear Power reveals how far prices are likely to get away from their moving average before returning. Elder-ray offers one of the best insights into where to take profits—at a distance away from the moving average that equals the average Bull Power or Bear Power. Elder-ray gives buy signals in uptrends when Bear Power turns nega- tive and then ticks up. A negative Bear Power means that the bar is strad- dling the EMA, with its low below the average consensus of value. Waiting for Bear Power to turn negative forces you to buy value rather than chase runaway moves. The actual buy signal is given by an uptick of Bear Power, which shows that bears are starting to lose their grip and the uptrend is about to resume. Take profits at the upper channel line or when a trend- following indicator stops rising. Profits may be greater if you ride the uptrend to its conclusion, but taking profits at the upper channel line is more reliable. Elder-ray gives shorting signals in downtrends when Bull Power turns positive and then ticks down. We can identify the downtrend by a declin- ing daily or weekly EMA. A positive Bull Power shows that the bar is strad- dling the EMA, with its high above the average consensus of value. Waiting for Bull Power to turn positive before shorting forces you to sell at or above value instead of chasing waterfall declines. The actual short- ing signal is given by a downtick of Bull Power, which shows that bulls are starting to slip and the downtrend is about to resume. Once short, take profits at the lower channel line or when the trend-following indicator stops falling, depending on your style.
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