Closing Score discloses to traders the sentiment of the traders in control of the current price action. If we can accurately determine trader’s sentiment, we can determine where the market is heading.
The Closing Score indicator, is provided as one of eight indicators within the StockDotGenie, market, add-on packages within the TradingView.Com platform. It utilizes a very simple concept and formula to determine the trader's collective sentiment. The formula (provided above) produces a range that is extracted from the true range of the stocks activity. The High to the Low within the time frame / bars you have chosen. The final output of the formula produces a finite score, between 0 and 100 that indicates to the trader, what the sentiment of the traders where, at the conclusion of this bar or at the end of the trading day, if you are trading in that time frame. This is displayed on a graph with 10 horizontal stratifications (shown below) each representing 1/10 of the indicators total range of 100. The final dots utilized to indicate the output of this indicator are then rounded up to allow placement within the graphs stratification.
The closer the indicator's outputted signal comes to either extreme, zero or 100, the stronger the correlation is between the closing score and future price movements. 97 to 100 are very strong positive signals. 0 to 3 are very negative signals and both have been validated as statically significant (Three Sigma signals). Additionally we have added an interior band within the placement of the dots to indicate that their proximity is within 3% of the extreme reading of this indicator. If the volume is above the 14 day moving average it is indicated by placing a dot within the center of the indicator dots to denote a volume conformation of this specific indicators signal. Dots that are both within the statically relevant, extreme range and the volume for these bars where above the 14 day moving average produces a bulls-eye. Please see the video for a more in-depth explanation of the implications of the various signals displayed by the indicator.
Price and volume are often overlooked as indicators, in and of themselves. They are in fact the most powerful, valuable and reliable indicators of future price trends available to us, primarily because each day’s price action contains within it, the collective sentiment of all of the traders who bought and sold that equity, on that day.
The more determined traders are to get into a stock the stronger the demand will be. When there is high demand for a stock, the pressure on the price increases, moving it up during the trading day. This increased demand will sometimes see a stock close at the high of the day. Closing Score calculates the range of the day, sometimes referred to as the “True Range,” by dividing it into 100 equal segments. You can then determine the stock's Closing Score by determining where on this range of, 0 – 100, the closing occurred. The Closing Score is plotted as gray = neutral, green = positive or red = negative, dots, plotted on a scale of 0-100. Please refer to the graphic above and to the right. Anything above 70 indicates a strong close and positive trader sentiment. A close around 100 ((B) Green Bullseye) in graphic below, or very close to it, is so strong that it can actually indicate the end of a run, (D) and thus has the potential to be a contrarian or overbought indicator. Any close below 30 indicates a weak close and negative trader sentiment. Close’s, close to or at zero ((A) Red Bullseye) indicate very negative sentiment and just as a close at 100 can be counter intuitive, a close at zero often indicates exhaustion within the traders of this equity, and you will often see prices climb from this emotional bottom. The higher the volume the more confidence you can have that the closing price is an accurate reflection of the sentiment indicated by the Closings Score. A small dot in the center of any of the red or green dots indicates that the volume is above the 14 day moving average and can be interpreted as conformation of the closing scores indication.
It has been widely documented that stocks trending up, tend to close closer to the high of the day than the low of the day. Stocks trending down tend to close closer to the low of the day than the high. But there are special situations that provide us with a great deal of very specific and very valuable information. It works like this and it’s very simple, obvious and accurate as a predictor of which way a stock will next move. Maybe not tomorrow, but within the next few days.
The relative position of the close or the "Closing Score," allows traders to quickly grasp, in one simple indicator, the markets most important window into the sentiment of the market participants trading your stock on any given day.
Two distinct Closing Score evaluations, both providing valuable, insightful and current information allow SDG users to accurately gage recent and trending trader sentiment. Each days Closing Score's, relative importance, is directly related to how close to either possiable extreme the close occurred. If the stock closes at zero or one hundred, then you are looking at very important information. Anything between 30 and 70 is in a neutral territory and does not provide you with definitive information.
(A) is indicating a close at zero in this JUNO chart from June of 2015. Combined with a very large candle body and an increase in volume, it becomes a very strong indication of future downward price pressure. (B) Is the exact opposite of the previous situation. The candle's body closed at 100 and also had a large candle body compared to recent trading action. The volume was also above the 14 day moving average. This confluence of price action and closing score, again combined with volume indicates very strong positive price pressure. The Moving Linear Regression of the 14 day moving average of the Closing Score is indicated by (C). If you look just above the gold colored "C" on the stock chart you will see a red bullseye indicating that this candle closed at the low of the day. (This Closing Score icon was pasted here in photoshop to demonstrate what the indicator below is accomplishing.) Obviously it came in the middle of a trend and did not initiate a change in the direction of that trend or did it? At this point on the chart "C" the closing scores started to trend down. This was several days in advance of the actual equity price following suit. Moving Linear Regression provides you with a longer term interpretation of the sentiment of the traders in this equity over complete trendcycles. This can be instrumental in warning you of impending tops or bottoms.
Another option has recently been added to the Closing Score indicator providing a smoother interpretation of the sentiment output of this indicator over time. This utilizes a Laguerre filter, which you can read about on our TWIST page. This option was provided to complement our day trading TWIST indicator. It can now be turned on or off within the Format pallet under Inputs.
Inputs for this indicator, “UPPER CLOSING SCORE TRIGGER” and “LOWER CLOSING SCORE TRIGGER” allow for the user to determine where positive and negative signals are cutoff. I set them at 70 for the positive indicator and 30 for the negative indicator. Neutral numbers, those ranging between 31 and 69 do not provide enough certainty to help assist in your trading decisions. This will have the effect of removing all dots from the indicator that do not meet your personal criteria.
Positive or negative sentiment can be best visualized at the very end of the trading day. Time to get into this stock is running out. If no one cares the price will falter at the close. If investors are desperate to get into the stock the price will continue higher until the bell rings making the close equal to or very close to the high of the day. (B) If buyers are rushing in and the stock is still trading at the high of the day, that clearly demonstrates strong demand that very often translates into increased price action over the next several trading days. If subsequent trading days also demonstrated this kind of demand/strength, then it will often move upward for weeks. The stronger the demand traders demonstrate to be “in” this stock, the closer the close of the day will be to the high of the day. This window into the sentiment of traders of this stock is dramatically focused by observing volume. If the volume is increasing at the same time that the closing score is increasing, you have a very strong leading indicator of future price increases. Of course if you want to short a stock the opposite is true with the following exception. You still want to see strong volume confirming your trades trends direction.
Volume is the second most important feedback from the markets that we, as traders have the opportunity to view, second only to price. Each dot drawn on the Closing Score chart displays the Closing Score by placing in within the band of the same level. When todays volume is above the 14 day moving average, a small dot is placed within the center of the primary indicator's dot and helps you to determine what level of conformation, volume is contributing to the current closing scores. A small ring within the primary dot indicates a close at zero or one hundred. If the stock closes at one of the extremes with volume above the 14 day moving average the combination of these outputs will produce a Bulls-Eye. Bulls-Eyes are very important signals flagging opportunities to capitalize on the emergence of clearly signaled trader sentiment.
At this point we need to briefly revisit the volitity issue. Because of the computerized trading systems making the statement that a stock will go up the next day becomes far more unpredictiable. But our interpertation of the damand is still accurate no matter what the stock action over the next day may bring. It is the short term trend that we care about and we have a window into the traders sentiment that will pay rewards by allowing us to see this demand. The next day may be a down day as short term traders take profits, but there is a very high probiability that the trend will still continue higher over the next days or weeks.
As you can see from the candles on the right, each succeeding days close was closer to the High of the day. This clearly demonstrates that the demand for this stock is increasing each suceeding day as the Close, closed closer to the High of the day for each subsaquent day.
This presents us with a short term opportunity. By screening for stocks that have demonstrated this growing demand, closing near or at the High of the day, for several subsaquent days, over a given time frame, we can find stocks that have a high probiability of moving higher in the next few trading sessions. More than enough time for us to move in and opportunistically take profits over the three to five days our swing trades traditionally take. Add increasing volume into this equation and you often see them move dramatically higher. Closing Score provides you with this exact insight into the markets current trading action.
Ironically when stocks are trading close to resistance levels and experience a closing score at the very bottom of the range, they are often indicating an over bought situation and / or a change in trader sentiment. This complete exhaustion can indicate the approach of a top in the next few trading sessions.
Soon I hope we will be able to scan for stocks meeting specific conditions. Here is what I will be scanning for using this indicator. When you see several strong closing scores, as a stock’s prices is moving sideways or declining, you have a good candidate to watch closely to see either another leg up or a strong reversal. Additionally a stock that has experienced an increasing closing score over the last several bars is also a good candidate to add to your watch list. Another Indicator in this same window pane enables you to watch the total occurance count of positive and negative closing scores as well as long tails. The link to the "Closing Score Count," indicator page is at the bottom of this page.
A blue background indicates very high volume as determined by a center of gravity calculation and I interpret these situations as a strong conformation of the sentiment the closing score is indicating. The occurrence of a Doji produces a gold background color. Doji’s are an important situations to take notice of when trying to determine sentiment. Even if you have a slightly positive or negative closing score, if the bars candle produces a doji, then this indication of indecision should temper you interpretation of the current closing score.
Utilizing this same information, but displayed in a way that provides to the trader, a strong indication of the stocks momentum as well as insight into the participation of institutional traders, for any equity you are examining, can be found in the page describing the next StockDotGenie indicator; Closing Scores and Long Tails Count.
The fellowing information is an attempt to provide a brief overview of the various methods and resources available to traders, enabling them to extract and determine what the prevailing sentiment of those involved in a market or equity currently are.
The first paragraph of a paper written is 2007 provides both an excellent description of “Investor Sentiment in the Markets,” as well an excellent summation of it’s validity to traders.
The first assumption, laid out in “Noise Trader Risk in Financial Markets” , is that investors are subject to sentiment. Investor sentiment, defined broadly, is a belief about future cash flows and investment risks that is not justified by the facts at hand. The second assumption, emphasized by Shleifer and Vishny in “A Model of Investor Sentiment” , is that betting against sentimental investors is costly and risky. As a result, rational investors, or arbitrageurs as they are often called, are not as aggressive in forcing prices to fundamentals as the standard model would suggest. In the language of modern behavioral finance, there are limits to arbitrage. Recent stock market history has cooperated nicely, providing the Internet bubble and the ensuing Nasdaq and telecom crashes, and thus validating the two premises of behavioral finance. A period of extraordinary investor sentiment pushed the prices .
I would take exception with one element of this description and that would be that trader’s sentiment, more often than not, actually does, accurately reflect the facts at hand. This factual sentiment can be demonstrating lag or is slightly ahead or behind of actual events. Often this lag is a trading opportunity if you are aware of the specific circumstances generating the change in sentiment.
Determining what the emotions and sentiment of traders are, regarding any equity or market, can be one of the most important predictive indicators you can extract from the universe of available information.
Stock & Commodities published an excellent article: “News Sentiment” on how news drives sentiment and our increasing ability to monitor and analyze that flow of information. That article provided multiple links to news sentiment resources. DragonFish, Opfine, FinSents, RavenPack, StockNewsSentiment in addation the following news services all have sentiment analytics services: Dow Jones, Thompson Reuters, TR-Elektron and Bloomberg.
Seeking Alpha is a great site to aim these tools at, but is by no means the only place to extract what the opposing sentiments and competing stories are of any stock. Often articles are insightful enough or persuasive enough that analytics are completely unnecessary. An article specifically addressing this concept can be found here: “Seeking Alpha as a Predictor of Stock Movements and Earning surprises.”[v]
The versatility of the analytics word tools are unlimited as you can build real-time databases of the sentiment contained within documents obtainable from any of the following sources. Documents filed with the Securities and Exchange Commission. Articles in financial publications such as: Wall Street Journal, New York Times Business News, Investors Business Daily and Financial Times. Reports on a stocks appearing on financial news sites such as CNBC, MSNBC, Bloomberg and Fox Business. Financial sites that focus on peer and editorially reviewed articles that focus on equities such as Seeking Alpha, Trefis and Kapitall. Message boards on various sites including Yahoo Financial, Google Financial and StockTwits. Many other web sites become analytical analysis targets buy virtue of containing commentary on a particular stock, including social networks.
The analytics of search query terms is another word based sentiment indicator. “The Sum of All FEARS: Investor Sentiment and Asset Prices,” is a good article discussing the correlation between specific words encountered in search queries and resulting direction of markets and stocks. A link to the pdf of this article can be found here.
Story stocks are a cliché of traders, albeit an important sentiment concept that can be very profitable. Irrational exuberance can be driven by stories such as Apple’s magical cable killing television that would allow for the easy navigation of hundreds of channels and thousands of programs and movies. No one has seen this incredible advancement in televisions as yet, but that “story” has helped to propel Apples stock over the last few years. Now it’s the Apple Car and Virtual Reality. Very different products, but the same concept as a sentiment driver of the stock. Enigmatic and captivating stories that propels positive sentiment.
Fear and greed indicators including options ratios, and short interest also provide good additional insights into trader sentiment. Social indicators that gage the wisdom of crowds can also provide relevant feedback of trader’s attitudes toward an equity. These include tools such as Google trends, Trefis, alacra PULSE, estimize, Kapitall, Predict Wall Street, StockTwits, and twitter. “Twitter messages, or tweets, can provide an accurate reflection of public sentiment when taken in aggregation.” This introductory statement is taken from a University of Texas study titled; “Sentiment analysis on Twitter with stock price and significant keyword correlation,[vi]” that provides an excellent primer on the extraction of traders sentiment and the resources required to accomplish this.
 “Noise Trader Risk in Financial Markets.”DeLong, J. Bradford, Andrei Shleifer, Lawrence
H. Summers, and Robert J. Waldmann.1990. Journal of Political Economy, 98(4): 703–38.
 “A Model of Investor Sentiment;” Barberis, Nicholas, Andrei Shleifer, and Robert Vishny. 1998. Journal of Financial Economics, 49(3): 307–43.
 Investor Sentiment in the Stock Market; Malcolm Baker and Jeffrey Wurgler; Journal of Economic Perspectives—Volume 21, Number 2—Spring 2007—Pages 129–151