Understanding MarketCarpets

Understanding MarketCarpets

Understanding what is happening in the market from a technical perspective can involve looking at lots of charts. There are charts of high-level composites and averages, sector indices, and industry indices, not to mention the charts of individual stocks themselves. Stock Scans can often reduce the number of charts that an analyst must look at, but they always leave you wondering “Did the scan miss anything?” Now a tool is available on StockCharts.com that solves these problems. Our MarketCarpet tool shows you at a glance what the hot sectors, industries, and stocks are. Think of it as a visual stock screening tool that is simple to use, yet extremely powerful. In this article, we'll discuss how the MarketCarpet works, the specifics of each carpet that we publish, and how you can use different indicators and different carpets to meet your analysis needs.

How the MarketCarpet Works

Our MarketCarpet tool presents a large collection of stocks as a “carpet” of colored squares. Each square represents a stock, mutual fund, or index. Squares are grouped together logically depending on how the carpet is organized – it could be by sector, by industry group, or some other system. Within each group, the squares are arranged by market capitalization (when applicable) from smallest (upper left) to largest (lower right). Normally – in square mode – all of the squares are very similar in size, but it is possible to switch to market-cap mode where each square is sized according to the company's market capitalization.

Which square corresponds to which company? Typically, you'll move your mouse over the square that you are interested in to find out. Double-clicking any square will bring up the SharpChart of that symbol for closer study.

While the size and position of each square is interesting, the most important aspect of each square is its color. The color of each square depends on the value of the technical indicator that appears in the upper-left corner of the carpet. Some of the technical indicators that are supported include Price Performance, RSI, and Bollinger Band Width. Each indicator has a range of values that appears at the top of the carpet as a colored scale. Most indicators work on a percentage scale (0-100) in which case 0 is one color (bright red for instance) and 100 is another color (bright green typically).

Note: Since color preference is a personal choice, the carpet has several different color options which are explained in the User's manual. For the rest of this article, we will refer to the default color scheme (green, red, yellow). Just substitute in alternate color names if you use a different color scheme.

It is crucial to understand that a MarketCarpet can work in two different modes: Absolute mode and Change mode. The mode is controlled by the Delta button that will appear next to the indicator drop-down when both modes are available. If the Delta button is raised, the carpet is in Absolute mode. In this mode, there will only be one date displayed in the upper right corner and the date slider at the bottom of the chart cannot be stretched. In Absolute mode, the color of each square directly reflects the value the selected indicator on the date specified by the slider. For example, if the RSI indicator is selected and the Delta button is not pressed, the color of each square reflects the value of the RSI indicator.

In Change mode, the date slider changes into our familiar, stretchable three-part slider that lets you specify starting and ending dates. In this mode, the carpet tool subtracts the value of the selected indicator on the starting date from the value of the indicator on the ending date and uses that difference to color the squares.

Note: While most indicators support both modes, a couple of them (Price Performance for example) only support Change mode. If that is the case, the Delta button won't appear until a different indicator is selected. This can be confusing since Price Performance is typically selected when the carpet first appears.

Which mode should you use? That depends on the kind of stocks you are interested in analyzing. Absolute mode is useful when you only care about the value of the indicator on a given day. If you want to see which stocks have the strongest RSI today, you can select the RSI indicator and make sure that the Delta button is not pressed. Stocks with strong RSI would then have bright green squares. (Note: If you are in “Top/Bottom Five” mode, the carpet will automatically indicate the top and bottom five stocks with numbers inside the squares.)

On the other hand, to see which stocks have had the biggest RSI improvement over the past week, select the RSI indicator, make sure the Delta button is pressed, and stretch the date slider until it shows “6 days”. Now the bright green squares are the stocks that have had the largest increase in their RSI value during the week.

Pre-defined MarketCarpets

StockCharts.com provides several different carpets, each with a different collection of stocks to analyze. Each carpet provides a different way of looking at the market. Here is a description for each of the carpets currently on the site:

S&P Sector MarketCarpet

Click here to view This carpet contains all of the stocks in the S&P 500 Large-Cap index, grouped into the nine different sectors as defined by Standard and Poor's. Which stock goes into which group is determined by its membership in the nine Amex Sector SPDRs as found on the Nasdaq-Amex Web site. This carpet gives you a broad view of the market from a large-cap perspective as well as from a broad sector perspective. It is great at finding quality companies whose stocks may be temporarily overbought/oversold. It is also perfect for seeing Sector Rotation activity and shifts in Market Breadth.

Major Averages MarketCarpet

Click here to view Want to learn why the Dow was down 100 points today? or why the Nasdaq shot through the roof? Then this is the carpet for you. The Major Averages carpet contains the stocks that make up the Dow Jones Industrial Average, the Dow Jones Transportation Average, the Dow Jones Utilities Average and the Nasdaq 100 Index.

Market Summary MarketCarpet

Click here to view This carpet contains all of the indices that make up our Market Summary page. From major US market averages to bonds to currencies to world markets to sectors - this carpet has it all. It also includes over 30 different industry indices. It's perfect for getting the broadest perspective possible. Keep in mind that each grouping on this carpet is fundamentally different and so the “Top/Bottom Five” isn't too useful unless you drill down into a group by clicking on its title bar.

Fidelity Funds MarketCarpet

Click here to view This carpet contains most of the mutual funds from Fidelity grouped by fund type. Growth funds, Select Portfolios, Index funds - there are all here. Even if you are not a Fidelity investor, this carpet can give you a sense of the overall market and which kind of funds have been doing well recently. Note: Since Mutual Fund data is only provided after the market closes, this carpet is updated once a day.

MarketCarpet Indicators

In order to interpret the carpet results properly, it is important to know exactly what each of the indicators on the carpet really means. Here's the low-down:

Price Performance

Price Performance is simply the percent increase or decrease in a stock's closing value over time. Unlike most of the other indicators, it requires a start date and an end date, thus it only works in Change mode. It is calculated by subtracting the starting closing value from the ending closing value, dividing that difference by the starting closing value and then multiplying the result by 100.

Price Performance shows you the bottom line. Stocks that have been increasing in price will be green, those that have been falling are red. Dark green is good (for longs), dark red is bad. Note: Don't forget to switch between Short-Term and Long-Term coloring mode as you lengthen or shorten the date slider, by clicking on the color-range bar.

Up Days-Down Days

As its name implies, this indicator counts the number of days that a stock moves higher and then subtracts the number of days that it moves lower during the specified time span. Like Price Performance, this indicator only works in Change mode. To get good results, the date slider really needs to include 4 or more days in the calculation.

This indicator is often the best indicator for measuring overall market breadth and sector rotation effects. If you are interested in finding stocks with consistent increases or decreases, this indicator can help.

RSI

The RSI indicator is defined in detail in our Chart School. It ranges between 0 and 100. The MarketCarpet computes the value of the 14-day RSI for every stock. Unfortunately, you cannot change the 14-day period in this version of the tool. In Absolute mode, each square is colored based on the stock's RSI for the date specified by the slider. In Change mode, each square is colored depending on the increase or decrease in the value of the RSI over the time period specified by the stretchable date slider.

RSI is a momentum indicator that compares the magnitude of a stocks gains on up-days with the magnitude of its losses on down-days. In a sense, it attempts to combine the previous two indicators (Price Performance and Up Days-Down Days) into one number. In Absolute mode, this indicator shows you the stocks that have performed well consistently during the past 14 days. In Change mode, the carpet will point you to some potentially great turnaround plays.

PPO

PPO stands for “Percentage Price Oscillator” and is also defined in detail in our Chart School. The PPO is very similar to another very popular indicator, the MACD. The difference is that the PPO is scaled to be price independent. That means that you can compare the PPO value for a stock that is $90/share with the PPO value for a stock that is $3/share – something that isn't possible with the MACD. On the carpet, the PPO indicator is calculated using the standard 12-26-9 parameters. Both Absolute and Change modes are supported.

Like the MACD, the PPO is an indicator with both momentum and trend-following properties. It is not quite as sensitive to reversals as the 14-day RSI and therefore will often give better long term signals. The PPO oscillates around zero with +100 and -100 being the theoretical upper and lower limits. Values outside of +30/-30 are rarely seen however and +15/-15 can be considered overbought/oversold territory.

Bollinger Band Width

Bollinger Bands are two lines that are drawn above and below the 20-day moving average for a given stock. The lines are positioned “2 Standard Deviations” away from that central moving average. Our Chart School article gives more details. The important thing to realize is that the distance between the upper and lower bands changes depending on the volatility of the given stock. Remember: “Bollinger Band Width == Volatility”.

The carpet displays Bollinger Band Width on a quasi-percentage basis so that stocks with different prices can be compared. In Absolute mode, the squares are colored using the value of the upper band minus the value of the lower band divided by the value of the central moving average times 100 (phew!). The result is a value that ranges mostly between zero and 100 (although higher values are possible). Low values correspond to low volatility and high values don't. ;-) You can use Absolute mode to find stocks that have high or low volatilities on the specified date. Change mode will show you which stocks have gotten more volatile (green) or more stable (red).

Bollinger Band Position

Prices tend to gravitate towards the center of their Bollinger Bands. The further they are from the center of their bands, the more likely they are to move back towards it. This tendency can be used to identify good trading opportunities. The Bollinger Band Position indicator converts the area between the upper band and lower bands into a range from +100 (the upper band) to -100 (the lower band) with 0 as the position of the central moving average. Note that if the stock is above the upper band, it will have a value above +100. If it is below its lower band, its value will be below -100.

In Absolute mode, bright green stocks on a Bollinger Band Position carpet will indicate stocks that are near or above their upper Bollinger Band and therefore more likely to move lower in the short term. Bright red stocks indicate the opposite. Keep in mind that the indicator says nothing about the width of the bands and stocks with very narrow Bollinger Band can result in misleading values. Always double-click the interesting squares to see the underlying SharpChart!

StochRSI

StochRSI is an advanced indicator that combines the Stochastics and RSI oscillators. It is very sensitive and is prone to giving false signals, but it will often give signals very early in important price movements. Our Chart School has more detailed info.

By now you should know the drill - use Absolute mode to see the values on a given day and Change mode to see which stocks have big increases/decreases in their StochRSI values. The only new twist is that the StochRSI is designed to move quickly from 1 to 0 and back again, so most squares on a StochRSI carpet will either be bright red or bright green, not something in between.

Analysis Techniques

The MarketCarpet tool can be used in several different ways to give you different perspectives on the market and on individual stocks. In this section, we'll cover a couple of the common techniques. The tool is very flexible however and it wouldn't surprise us if you are able to come up with some interesting analysis variations on your own. If you do, please let us know!

Scanning for Stocks to Buy or Short

If you are a trader who is looking for good long or short opportunities in the market right now, try using the carpet either in Absolute mode or in Change mode with fairly short time durations. The S&P Sector Carpet will show you current large-cap possibilities while the Major Averages carpet will show you High-Tech and Blue Chip possibilities. Review the second paragraph for each of the indicators in the previous section for the kind of signals you will get from each indicator. My personal favorite is the Bollinger Band position in Absolute mode, but each indicator is worth investigating.

Sector Rotation Analysis

Sector Rotation looks for linkages between different groups of stocks based on underlying economic relationships and cycles. In the past, people have tried using sector-oriented indices or funds to represent the performance of each sector as a whole. The problem of course is that each sector index hides what is actually happening with each of the stocks that make up that index. One very weak stock may cause the index to decline even though all of the other stocks in the sector are healthy. Our S&P Sector Market Carpet helps you avoid that problem by showing you all of the components that make up each S&P Sector index. By looking at the carpet as a whole, you can get a better sense of the true strength or weakness of each sector.

Here are the steps I follow to spot sector rotation using the Carpet tool:

  1. Pull up the S&P Sector MarketCarpet. When it appears, it will be in Price Performance mode. Click on the color scale to use the longer-term scale (+15%/-15%) and then stretch the left side of the date slider to the left until the slider says '6 days' (one week).
  2. Now move your mouse over the center of the date slider then press and hold down the mouse button. With the mouse button still pressed, move the mouse left and right.
  3. Watch for areas of green and red to move about the chart within the sector groups.
  4. Because we are in 'square mode', each stock is weighted equally within the carpet. While this is what I prefer, I sometimes switch to 'market cap mode' (by right-clicking and using the popup menu) and see if that changes what I'm seeing.
  5. After noting any potential rotation effects based on Price Performance, I switch to the 'Up Days-Down Days' indicator and repeat the process. Does this indicator confirm the effects I saw before?
  6. Finally, I switch to the RSI indicator in Absolute mode. Again, as I move the slider back and forth, do I still see the same rotation effects occurring?

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