Technical Analysis of Stocks Commodities
Magazine Article - November 2005

The following article appeared in the November 2005 issue of :



"Technical Analysis of STOCKS & COMMODITIES, The Traders' Magazine that provides serious traders with information on how to apply charting, numerical and computer trading methods to trade stocks, bonds, mutual funds, options and futures."

Chart Your Stocks With Float Charts

Price is king. Volume is queen.  Both live in the context of time.  But is there a prince or prime minister who has been overlooked?  Float charts may have the answer.

By Steve Woods

In my 1996 article in Stocks & Commodities, I introduced the cumulative volume float indicator and demonstrated a dynamic relationship between a stock's price and volume and its floating supply of shares. The idea was simple: by adding up volume cumulatively on a chart, we can identify rectangles that correspond with areas of accumulation at the bottom and distribution at the top. Since then, I have come to realize that what I discovered was not just a new indicator but an entirely new type of stock chart.

To understand, consider this question: What data goes into creating a stock chart? Price and volume. Is there a piece of data that stock charts have not been using? If the historical pantheon of charting begins with candlesticks, then goes to point and figure, and moves on to price and volume, I would ask: Is there a fourth way of charting stocks? Is there a new way to look at what is happening in a stock’s trading history? Yes! The missing data is the float number. The new type of chart is a float chart and its origins go back to W.D. Gann’s book Truth of the Stock Tape originally published in 1923.

DEFINING TERMS

To explain what Float Charts are, I will first define four key terms: float, float turnover, float boxes, and float channel lines. Then I will present a float chart example and clarify how these new charts are created as well as demonstrate how I make money using them.

The term float refers to the number of shares actually available for trading. When a company goes public they issue shares outstanding. The management then holds some percentage of shares and what's left over to be sold to the public is called the float or floating supply. Float Charts are all about tracking the floating supply in an attempt to find areas of accumulation and distribution on the chart due to a change in the ownership of the floating supply.

I coined the term float turnover. It refers to any time frame on the chart in which the cumulative volume equals the number of shares in the floating supply. Float turnovers are shown on the chart as a yellow rectangle with two red lines. The rectangle changes from day to day like a moving average and is known as the float turnover box or more simply the float box.

The upper and lower right hand corners of the float box get plotted on a day-to-day basis thereby creating float channel lines. These channel lines allow us to see the "tracks" left behind from previous float turnover boxes in the past. By creating float boxes from half or quarter of the floating supply, we get narrower channel lines within the larger 100% float box channel lines. These narrower lines, known as the 50% and 25% float channel lines show where stocks have a tendency to find support at the bottom of corrections and resistance at the top of retracements.

BOTTOMS, TOPS, AND AREAS IN BETWEEN

Float Charts are very helpful in understanding the character and stage of development of a stock. The Float Chart of Sirius Satellite (SIRI) is an excellent example. By placing float boxes at various stages of its trading history, you can see areas on the chart that help us to see where accumulation occurred at the bottom, where the float changed hands during a basing pattern on the way up and where a final distribution top occurred as well (See Figure 1).


FIGURE 1: FLOAT BOXES. These help you identify where accumulation occurred, where distribution took place, and where the float changed hands.

The underlying logic of float turnover boxes is that they show us areas on the chart in which the floating supply has changed hands. But in fact we cannot say for sure that the entire float has turned over during a float box, we can only say that the trading volume during the float turnover box equals the floating supply.

What percentage of the float actually has traded is impossible to know. In this sense float charts have an intuitive nature. We cannot know for sure that smart money has bought the entire float at the bottom and sold it at the top but it is possible to intuit that something close to this has actually happened. They also hold the potential for buying the breakout above the bloat box at the bottom and selling the breakdown below the float box at the top.

A CLOSER LOOK

To understand float charts more clearly let's study an example of one of my recent winners. The stock was Hansen Natural (HANS). It currently has 7.9 million shares in its float. To create its current float box, simply add today's volume with yesterday's and that total with the volume of the day before that and continue a cumulative sum until the total in the backward count reaches 7.9 million. At this writing, it takes 12 days to reach 7.9 million shares. Thus its float turnover box is a rectangle going back 12 days. The top and bottom line of the float box are created by finding the highest and lowest price in the backwards count which in its current box is $63.35 on the high side and $52.21 on the low side.

Note I said current box. It is very important to realize that float boxes change from day to day much like a moving average. The float box size gets recalculated every day as the new volume number is used to determine how far back the box will extend. Now think of the box moving to the right and as it does so, imagine the upper right hand and lower right hand corners being plotted on a day-to-day basis. The upper and lower right hand points are thus used to create the upper and lower float channel lines.

Now imagine a box that is created using half the float number (or a quarter of the number). For HANS, this would be half of 7.9 million or 3.95 million (one fourth would be 1.98 million). Now imagine a smaller box with its own upper and lower channel lines. These channel lines get called the 50% float channel line because they're created using a box that is 50% the size of the full float box (or the 25% float channel lines if using a value of 25% ). Now take away the 50% box (or 25% box) but leave the 50% channel lines (or 25% lines) and you have a float chart.

Figure 2 shows HANS with all the lines labeled. Note that I've included the 50% Float Box for demonstration purposes only, as ordinarily this box is hidden and you know its there only by the dotted channel lines that are its tracks. I've left out the 25% boxes/lines.

FIGURE 2: FLOAT CHART. Here yo see the float channel lines, the float boxes, and the channel lines associated with the boxes (50% in this case).

One final but very important point concerning float boxes is how they get plotted on days when the price is penetrating above or below them. This idea applies to stocks penetrating either top or bottom lines but for simplicity sake, let's just look at penetrations through the top red line.

Let's say a stock has been trading sideways for several weeks and the top of the float box (the upper red line) is at $25 and the bottom of the float box (the bottom red line) is at $20. Now let's say the stock finally penetrates above the top red line and makes a new high of $27. On this penetration day, we don't want the top red line to be placed at the new high of $27. If it got placed there, then we wouldn't be able to generate an alert that a breakout has occurred and it would be more difficult to actually see that the breakout had occurred. Instead we want the line at $25 to remain there so you can actually see when prices have penetrated. What gets sacrificed is the actual size of the float box on the day of the penetration. The actual size should be based on the new high that has just been reached. Figure 3 illustrates this point.

FIGURE 3: USING FLOAT BOXES TO IDENTIFY BREAKOUTS. When prices break out above the top line of a float box, you need to keep the float box at its original location so you can identify the breakout.

SUPPORT POINTS

Any one who takes the time to look at a large number of float charts will find one striking discovery again and again. Prices in up-trends tend to find support near their 50% and or 25% Float Channel Line. It is easiest to see this on a float chart with the float box removed, so let's look at a few examples.

I enjoy random sample demonstrations of float charts so I'm going to look at the Investor's Business Daily for today (May 5, 2005). The first three charts that are mentioned in the table labeled “NASDAQ: Where the Big Money's Flowing” on page B6 are Stamps.com Inc (STMP), Bone Care Intl Inc (BCII), and Per-Se Tech Inc (PSTI). Now let's look at their charts and see if support came in at or near either the 50% float channel line or the 25% float channel line at any point on the chart.

Stamps.com Inc (STMP) Figure 4
Using a daily float chart in Figure 4, you can see that from its January 28th, 2005 low of $11.96 to its May 4th, 2005 high of $22.88 Stamps.com found support at its 50% float channel line twice, once on March 23rd at $15.29 and again on April 14th at $15.07.

Bone Care Intl Inc (BCII) Figure 5
Using a weekly float chart in Figure 5, you can see that from its January 16th, 2004 low of $12.46 to its May 6th high of $32.47 Bone Care Intl found support at its 50% float channel line three times: the week of May 21st, 2004 at $18.51, the week of August 6th, 2004 at $20.10 and the week of November 5th, 2004 at $21.50

Per-Se Tech Inc (PSTI) Figure 6
Using a daily chart in Figure 6, which goes back to November 2nd, 2004, Per-Se Tech Inc found support at its 25% float channel line once and very close a second time: November 4th it bounced off it at $12.89 and on March 30th it came within five cents of it at $14.72

FIGURE 4: FINDING SUPPORT. Here you can see that Stamps.com, Inc. (STMP), found support at its 50% float channel line twice.


FIGURE 5: A STRONGER CASE OF SUPPORT. On this chart of Bone Care Intl., Inc. (BCII), you see that prices found support at the 50% float channel lines three times. twice.

FIGURE 6: SUPPORT AT THE 25% FLOAT CHANNEL LINE. On this daily chart of Per-Se Tech, Inc. (PSTI), prices found support at the 25% float channel line in late 2004.  In came pretty close to this line again on March 30, 2005.

DYNAMIC NATURE OF THE FLOAT CHANNEL LINES

One striking characteristic of the 50% and 25% float channel lines is their dynamic quality. It is a mistake to think of the 50% lines as being 50% of the distance between the top and bottom of the 100% float box. The channel lines have their basis in volume numbers not price numbers and thus can create levels that are not shown to relate to any past price level. Thus the lower 50% float channel line may actually show up near the top 100% float channel line or the near the bottom 100% float channel line. It all depends on the new volume data, which changes from day to day.

The fact that prices find support and resistance at different percentage levels within the float turnover is one of the great discoveries of float analysis and needs further explanation.


ABC FLOAT SET-UPS

In order to make money with these ideas, I use a simple ABC price swing model. The model is very simple and yet very powerful. The idea is that prices tend to move in a three-wave sequence: an A-wave up, a B-wave down, and a C-wave up again. In using this model to trade, you want to let the market show us strength with price and volume in the A-wave, then we want to see the volume dry up in the B-wave down to the 50% float channel line and then just as the price begins to move back up we jump on board for a profitable C-wave. By using the 50% float channel line to help us find the turning point that begins the C-wave, you look for high probability entry points.

STAY AFLOAT

Float charts are a new and powerful tool in the search for profitable trading. Float charts are an important addition to the collection of current methods of charting stock behavior. Although float charts and their analysis are not as widely known, used or understood as candlesticks, point and figure or price and volume charts; they are in fact an important development in the history of charting.

Steve Woods, an ex-elementary schoolteacher, is an author, speaker, professional trader and CEO of www.FloatCharts.com, an independent stock charting and market analysis service.

Suggested Reading

Gann, W.D. (1976) Truth of the Stock Tape, Lambert-Gann Publishing

Investor’s Business Daily, May 5, 2005

Woods, Steve (1996), “Float Analysis,” Technical Analysis of STOCKS & COMMODITIES, Volume 14: December

Woods, Steve (2000), Float Analysis, John Wiley & Sons.

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