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Technical Overlay

As a final step, the raw Rating may be adjusted to account for strongly trending stocks by applying a “technical overlay“, which can clip the Rating to “Neutral+” or “Neutral-“.

If a Very Bullish or Bullish stock closes below its long-term trend (the 200-day double-exponential average, or orange line on the Chaikin chart), the Power Gauge Rating will be clipped to Neutral+. The Bullish rating will be restored once the stock closes back above this line, assuming the raw Rating remains Bullish.

Conversely, If a Very Bearish or Bearish stock crosses above its long-term trend, the Power Gauge Rating will be clipped to Neutral-. The Bearish rating will be restored once the stock closes back below this line, assuming the raw Rating remains Bearish.

The overlay is applied when the raw Rating does not agree with the actual technical condition of the stock, as this indicates there may be some information driving the market which the model has not factored in yet.

When a Bullish Stock crosses below its long-term trend, it is at higher risk for a breakdown. By clipping to Neutral +, this is like applying a circuit breaker – it lowers the risk of the model, and reduces volatility in your returns if you are following the model, until price activity agrees with the Rating again, when the confidence level of the Rating is higher.

This allows the Chaikin Power Gauge model to respond to overall market trends: at times when many stocks are breaking down, the overall distribution of ratings will skew Bearish, and in times when many stocks are breaking out, rating distribution will Bullish.

Exception. A Bearish stock which closes above its long-term trend will remain Bearish if DEMA is falling.