Tuesday, December 4, 2007

Screening to Win: MFI (Money Flow Index)

The overview below describes one of the common technical indicators – MFI and provides insights on how to utilize it in your stock selection. Hopefully this outline will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators into their screening. The free HingeFire Stock Screener which can be found at http://www.hingefire.com is one of the few tools available that includes a wide selection of fundamental and technical criteria for selecting stocks. Using a combination of fundamental and technical screening is a powerful tool for winning in the market.


Money Flow Index Overview

The Money Flow Index is a momentum indicator utilizing volume that provides a sense of the money flowing in to and out of a security. MFI is created using a fourteen day period and compares the flow of money into a stock (positive flow) to the money flowing out of a stock (negative flow). Each day the average of close, low, and high is calculated and compared to the previous day. On days this average price exceeds the previous day is viewed as positive volume, on days below as negative volume. The positive and negative volume totaled over the 14 day period to create the MFI indicator.

Utilizing a scale of 0 to 100, the Money Flow Index is similar to other momentum oscillators. However MFI augments the underlying pricing information with a volume flow component when forming the oscillator.

The HingeFire tool provides support to incorporate the Money Flow Indicator in your creation of screens for stocks. Users can scan to determine if the MFI indicator is greater than or less than the key 20 and 80 levels, and also establish if the MFI value has just crossed above (JCA) or below (JCB) these thresholds.

How to use MFI in screening

Many investors utilize the Money Flow Index to identify oversold and overbought conditions. MFI levels below 20 are generally considered oversold and those above 80 are considered overbought. However MFI can remain at these levels for lengthy periods of time.

MFI provides solid insight into medium term trends. Investors normally use the Money Flow Index to time transactions or to filter stocks to exclude.

Overbought Territory

Stocks with MFI levels above 80 are considered over bought. Note that a number of these stocks may continue to rise in price and exhibit high MFI readings for a period of time. Most of these stocks are due for a tumble however as they approach an exhaustion level of available purchasers in the market. A number of traders screen for high MFI levels and then continually review the charts over a period of days for possible short candidates.

The MFI for MXM (MAXXAM Inc.) crossed above 80 about 3 weeks ago and has remained at this level. A screen with the HingeFire tool found this as one of the many stocks with an MFI level greater then 80. Pulling up a recent chart for MXM demonstrates that the MFI is likely losing strength and will shortly cross below 80 shortly.

Oversold Territory

Stocks with an MFI below 20 are considered to be oversold. Some oversold stocks are due for a bounce back. Others have negative fundamental and trend information associated with them and may continue to dive in price with solid volume for extended periods of time.. A number of investors screen for stocks with low MFI levels and then sort through the results looking for value candidates at appealing prices. This is a form of searching for recently created value in the market, taking advantage of short term mis-pricing. At times a sector or individual stock is punished by the market pushing it down with volume to levels of attractive valuation. The MFI technical indicator can be used to screen for these situations.

BVF (Biovail Corp.) recently endured a down trend with high volume and is below the 20 MFI level. An investor can research (or screen) the fundamental attributes of this stock such as P/E and see if it appears to be a solid value play now that the price has dropped to lower levels.

Break below Overbought

One common use for MFI is to screen for stocks that have just crossed below (JCB) the overbought condition at the 80 level. This normally serves as notice that the stock may continue to fall in price over the upcoming few weeks. Normally when MFI crosses below this level, the buyers have stepped away from the stock and upside volume is no longer present.

The MFI for MIDD (Middleby Corp.) just crossed below the 80 level. This is one of the examples found in a recent screen using HingeFire for stocks that JCB (just crossed below) the 80 level for MFI. This is normally a sign that buying may be exhausted and the price will retreat for a period of time.

Break above Oversold

One of the most common uses for MFI is to scan for stocks that just broke above the oversold condition and now should continue to rise in price. A breakout above 20 indicates a solid change in momentum for a stock as it exits an oversold condition as the downside volume is reduced.

RRD (RR Donnelley & Sons Co.) recently experienced a spree of selling with an associated drop in price over the past several weeks. The MFI just crossed above the 20 level which is a strong indicator that the selling volume is reduced and the stock has potential upside.

MFI Summary

Money Flow Index bears some similarities to RSI. However the Money Flow index utilizes volume in the calculation, providing an enhanced awareness of the size of fear and greed in the market.

A number of investors look at Money Flow Index on charts to scrutinize for divergences between MFI and the price trend of the stock. However the most common utilization of MFI is screening for oversold and overbought levels as outlined above.

Many investors focused on volume-driven technicals use the HingeFire tool to screen for the following situations with the Money Flow Index:

  • Overbought Territory – Screening for stocks with RSI levels above 80.
  • Oversold Territory – Screening for stocks with RSI levels below 20.
  • Break Below Overbought – Screening for stocks that JCB the 80 level.
  • Break Above Oversold – Screening for stocks that JCA the 20 level.

Combining technical indicators such as Money Flow Index with commonly used fundamental criteria when selecting your investments helps put the market edge in your corner. The MFI support in the HingeFire Stock Screener adds a powerful tool for searching for volume-related extremes that will improve the timing of your market transactions.