Tuesday, December 11, 2007

Screening to Win: Williams %R

The overview below describes one of the common technical indicators – Williams %R 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.

Williams %R

Williams %R Overview

The Williams %R was created by Larry Williams, and is useful for identifying overbought and oversold conditions in the market. The indicator shows the relationship of the current close in relation to the high-low range over a fourteen day period of time

Values above 80 are considered oversold while values below 20 are considered overbought. Note that this is the exact opposite of most oscillators that utilize a scale of 0 to 100.

The Williams %R Indicator is normally plotted inversely with 100 at the bottom and 0 at the top of the vertical axis. This is reverse of most oscillator graphs. Some charts present the indicator as running from -100 to 0

By the nature of its formation, the Williams %R indicator is generally quite choppy and active. Many times it will provide false signals, which is why investors should look for confirmation from charts or other indicators before entering a transaction.

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

How to use Williams %R in screening

Most investors utilize the crossovers from Overbought and Oversold conditions when screening with the Williams %R indicator. Unlike other oscillators, many times crossing into an extreme is of interest rather then just crossing out of it.

Many times the Williams indicator demonstrates price pressure on the edge of an extreme leading to a cycle of higher or lower prices in the direction of the prevailing trend for the period of time. This leads investors to screen for just crossing into extremes below 20 (overbought) or above 80 (oversold); as well as crossing out of these conditions.

Crossing into oversold

Stocks crossing above 80 are considered oversold with Williams %R. Many stocks cross above this threshold and continue in the direction of the prevailing trend for considerable periods of time. Many investors correlate the cross into oversold territory with other technical indicators and use the combination to gauge short-term price momentum.

MFRI (MFRI Inc.) recently crossed again into oversold territory under 80 (plotted at the bottom). The previous cross into oversold territory on October 22nd led to a significant slide in the price of the stock over several weeks. The recent crossover could be setting the table for a similar occurrence.

Crossing into overbought

Stocks crossing below the 20 threshold are considered overbought in the Williams %R indicator. Many times crossing below this level can be a sign that the price increases may continue for a several week period of time; therefore many investors screen for this occurrence.

A fairly volatile stock APFC (American Pacific Corp.) had recently crossed below the 20 level placing it in overbought territory. The earlier cross below this level at the beginning of October demonstrates that this can many times herald the start of a short-term period of price increases while Williams %R remains below the 20 threshold (plotted at the top)

Crossing out of oversold

Many times excellent opportunities exist when the Williams %R indicator crossed below the 80 threshold indicating the stock is not longer oversold. Most traders correlate this change with other technical indicators to confirm the new trend. Some investors wait until the Williams oscillator crosses the 50 mark before acting on a trend reversal. The Williams %R indicator is choppy by nature and can easily reverse after crossing below extremes which is why it is important to wait for the new trend to develop.

A recent HingeFire screen found that DRIV (Digital River Inc) has just crossed below the 80 level exiting the oversold condition. Correlation with other indicators may indicate that the new trend of increasing prices rising is likely to remain in place for several weeks.

Crossing out of overbought

Another trend reversal scenario occurs when the Williams %R indicator crossed above the 20 level indicating the stock is no longer overbought. Correlation with other technical indicators often indicates opportunities where the price is likely to continue to drop in price over a several week period. This can enable investors to time solid entry points at short term troughs in price or look at shorting scenarios.

FUQI (Fuqi International Inc.) held its IPO in November. Since this time the stock has traded in a range of $6 to $11.50. Recently the Williams %R crossed above the 20 threshold exiting the overbought condition. Since this time the price of the stock has dropped by more then two dollars.

Williams Summary

Williams is similar to the stochastic indicator, however the 14 days Williams %R tends to be more choppy. This leads at times to false signals regarding trend reversals and breakouts; on the positive side the Williams indicator tends to be quick and does not lag greatly. This all gets back to a regular theoretical discussion regarding signal quality versus speed. Overall, it is important to use other technical indicators to confirm the action in the Williams %R before performing transactions.

Many investors use a 28 day version of Williams %R in charts for a smoother version with less false alerts.

The HingeFire tool supports users in screening for the following essential situations with the Williams %R Indicator:

  • Crossing into oversold – Williams crossing above 80.
  • Crossing into overbought – Williams crossing below 20.
  • Crossing out of oversold – Williams crossing below 80.
  • Crossing out of overbought – Williams crossing above 20.

Combining indicators such as the Williams %R Index with other technical indicators enables investors to properly time entrance and exit opportunities in the market. The Williams Indicator support in the HingeFire Stock Screener combined with other fundamental and technical criteria provides a powerful tool to uncover prospects that can enhance your portfolio.