MIDAS - techncial Analysis Method

MI•DAS (abrev)

  1. Stands for Market Interpretation/Data Analysis System, an amazing technical analysis technique. Also known as a price spectroscope Syn. magic… as noted by astonished observers everywhere
  2. A a fabled King who's touch turned everything to gold.

Market Interpretation/Data Analysis System

Dr. Paul Levine, a lifelong student of markets, was a very smart person. He held an undergraduate degree from MIT and a PHd (in theoretical physics) from CalTech. Towards the end of his life he focused his attention on trading the market, and on developing MIDAS, a method he invented that provides a unique window into the undercurrents directing price movement.

Levine strongly believed that the dynamic interplay of support and resistance (S/R) and accumulation and distribution are the ultimate determinants of price behavior. After examining and rejecting all of the standard technical analysis techniques for determining support and resistance, he came up with a new approach.

Prices fall when there is more supply than demand. In a falling market, there exists a price at which new or returning buyers will enter the market as a purchaser. As they do in increasing numbers, the demand for the stock begins to rise. When supply and demand are in balance, the price stops falling. We say price has met support.

Likewise in a rising market there exist a price at which current owner will sell or take profits. As they do, the supply of the stock begins to rise. When supply and demand are in balance, the price stops rising. We say the price has met resistance.

A paradigm shift takes place where ever the market changes direction. The longer its falling or the longer it has been rising, the greater the importance of the paradigm shift.

The only thing a trader needs to know

The holy grail of trading would be to know a priori (beforehand) exactly where to expect support and resistance. Then the trader could just place buy and sell orders at those prices and just sit back sipping pina colladas on the beach. Oh if life were so simple…

The problem is when we look at a price chart, it looks like a “random-walk” having no obvious price levels where one would expect to find support and resistance. The trader needs a reliable way to objectively determine support and resistance levels. But that's not all he needs.

All trader's know that there are always counter-trend moves within the larger trend. If he or she attempts to react to every minor change in trend, what ends up happening is he or she gets "whipsawed". He's “out of phase” with the market and ends up getting in when he should be getting out and vice versa. Whipsaw action eats away a trading account by a string annoying loses and transaction fees and can devastate the trader's mental attitude. Being whipsawed is the bane of all traders and he needs a reliable way to avoid it.

The trend is your friend

When more shares are being bought then sold, we say the stock is being accumulated. While the price may not yet be rising, eventually it will. Accumulation presages an up-trend. Likewise when there are more shares being sold that bought, we say a stock is being distributed. Prices may not yet befalling when a stock is being distributed but is ususally only a matter of time before they do. A trader can track the constantly changing balance between buyers and sellers (accumulation and distribution) with an indicator invented by Joe Granville.

On Balance Volume

Joe Granville's on balance volume ("obv") is a curve that is constructed by adding today's volume to the (accumulated) on-balance volume if today's average price exceeds yesterday's average price, subtracting it if it is less, and not changing the on-balance volume if there has been no day to day change in average price. (The absolute scale of the obv curve is immaterial and is simply adjusted to fit on the same chart as the price). If OBV is moving up, the stock is being accumulated; if OBV is moving down the stock is being distributed. OBV makes it immediately clear.

Price Spectroscopy

Imagine you are from another planet and you arrive on earth and wander into a park and see people playing chess. The way they moved the pieces would make no sense to you because you would not know the rules of the game. That's how the typical price chart looks. There are no clearly evident trends, channels, support or resistance. To the untrained eye the market looks completely random.

What Levine discovered is a way find order amidst the chaos of typical price chart. MIDAS charcterizes the price action based on underlying realities rather than ad hoc empiricism or numerology. By processing the numbers (prices and volume) through a simple algorithm (a price spectroscope if you will) and by anchoring the S/R calculations to the actual paradigm shifts, theoretical support and resistance curves are made visible.

By running the numbers through our MIDAS S/R spectroscope we can know the rules of the game and perhaps for the first time it begins to make some sense. MIDAS S/R curves are a powerful taxonomic tool for identifying exploitable patterns for trading profit - patterns that could never be discerned by looking a prices alone.

Details of the System

Instead of ploting Price vs. Time, MIDAS unconventionally plots daily (average) price, theoretical support/resistance levels and OBV vs. cumulative volume rather than time. By ploting versus cummulative volume instead of time, less visual weight is given to slow periods where fewer shares are traded. There is no reason S/R curves can't be plotted “in the time domain”. But they will look “jerky” instead of being “smooth” like they are when plotted against cummulative volume.

When a stock is being accumulated, typically what happens is a hierarchy of support curves will emerge. The credibility of the S/R curve will be based on the number of times price bounces off of it. A well “validated” S/R curve is one that has succesfully predicted several trend reversals with little “porosity”. Porosity is a subjective measure of how close the midpoint of the price bar came the theoretical support level calculated with the MIDAS algorithm when the change in trend occured.

In an up-trend, when the market starts to correct, we wait for it to reach theoretical support. We then look at OBV to see if it still being accumulated. If OBV will be making a higher low when price reaches support then we know chances are very good that it will “bounce” off of that level. In a strong up-trend, prices will not reach support in a correction before heading higher.

In a down-trend, a heirarchy of resistance curves begins to emerge. When the market stops falling and begins moving up we wait for it to get near resistance. We then look at OBV to see if it is still being distributed. If OBV will be making a lower high when price reaches resistance then the stock is still being distributed and we know chances are very good that it will be turned back at resistance. In a strong down-trend prices will not reach resistance before turning and heading lower

By knowing where support and resistance will be found and by being able to track accumulation and distribution, the trader has objective clues as to the probable future of the stock. He has good idea of what the chances or odds are. The key word here is “chances”. Ultimately trading is still a game of chance… a game of “probablilities”. But wouldn't you rather trade with an objectively calculated roadmap than by “flying blind” without one? Thats what MIDAS does. Click here to read about our MIDAS tool for EXCEL