NEW YORK (Real Money) -- Black Friday means light trading, and many readers are taking the day off. For the diehards who are still around, I want to take a closer look at a new methodology that I have found exciting and helpful in making decisions for stocks, markets and even commodities. Current action in the market is a great example of the way markets differ technically at different stages in their development.
"Arms Candlevolume" is a combination of Equivolume (which I had introduced many years ago) and candlestick charts (which the Japanese have used for centuries). This tool provides the best possible way of graphically representing price and volume history, and therefore the best possible way of making intelligent decisions. Readers who have not already studied this, as presented in my columns in the last few months, should take a close look.
Must Read: Warren Buffett's Top 10 Dividend Stocks
The chart below shows just a few days of history in IBM (IBM) to illustrate the methodology. Each entry contains the opening level, the closing level, the high for the day and the low for the day.
Moreover, the width of each entry, based on the Equivolume principles, represents the volume. If the color of the internal rectangle is black, the stock closed higher than it had opened. If it is red, the stock closed lower than its open. The height of the box depicts the total trading range. Therefore, the shape of the outer box tells us how easy or hard it has been for price movement to occur.
But let's look at a longer-term chart. The S&P 500 over the last couple of months provides an instructive picture. Again, each box is one day, but look at how much variety there is. It is apparent that all days are not equal.
The last few entries are showing us tiny trading ranges and very low volume. This is in contrast to the days of the market low in October when volume was huge, trading range was equally immense and price changes were often quite large. Historically, this is usually the case. Bottoms reflect panic while tops reflect complacency. In both cases, of course, the emotions prove to be wrong. The last three days of trading have given us the tightest trading ranges in many months.
Below, we see a chart of Google (GOOGL) . Again, note how each entry tells us a story about how hard or easy it is for the price to move. The turn to the upside in October is radically different from the high at the start of November. It is apparent that we went from a "black trend" to a "red trend," with the gap and the square entry right on the high.
The methodology can also be applied to commodities, such as corn or gold.
This is just a brief overview. Traders should, I believe, closely study this new way of charting. My latest book, Arms Candlevolume, is a brief primer on this method.
This article previously appeared on Real Money Pro on Friday, Nov. 28 at 7 a.m. EST.