As readers of this market letter know, I make heavy use of two indicators created by John Person in my analysis: Person's Proprietary Signal (PPS), and Person's Pivots.
(If I should fully develop my own indicator, which focuses on price reversals, I shall name it, "Bovee's Bounce", showing the same degree of modesty as Mr. Person does.)
I had the good fortune this week of hearing a discussion by Mr. Person of how his indicators work.
One misgiving that I had about the PPS and the Pivots is that they are black boxes. Only John Person knows how they work, and he's not telling me. This is very unlike the macd or the fast stochastic or even the complex parabolic sar, all of which can be deconstructed so that when I see a signal, I know where it's coming from.
Mr. Person shed a dim light on what happens behind the scenes with his indicators.
He said that the Pivots are "based on a series of moving average values". No surprise there -- all pivots are.
Users of the PPS will know that the chart contains two moving averages, in addition to the buy and sell signals, but notes that the PPS isn't "generated by the crossover of a moving average."
Otherwise, Mr. Person outlined a trading method that relied on tape reading and volume confirmation using the On-Balance Volume indicator, all perfectly valid and unexceptional, and usable with any other price indicator, such as the parabolic sar or the macd.
I can make some guesses about the nature of the PPS based on what Mr. Person's uses for signal confirmation.
Any confirmation method must be based on a something that's not in the signal. If the confirmation duplicates the signal, then it is no confirmation at all.
So, he treats tape reading (high highs high lows, for example) as a confirmation, which suggests that the price trend isn't part of the signal itself.
He uses a volume indicator for confirmation, suggesting that the PPS is based purely on price.
He says explicitly that the moving average crossovers don't generate the buy and sell signals, but he does not rule out the using of moving averages entirely.
So my guess is that the PPS is based on moving averages of unknown length and that the signals are generated, perhaps, by the direction and distance of one moving average in relation to the other.
This suggests to me that macd, parabolic sar, Bollinger bands are perfectly acceptable alternatives to the PPS for price analysis. Certainly the confirmation methods that Mr. Person uses are perfectly applicable to these other technical tools as well.
Despite my misgivings about the closed source nature of the PPS and the Pivots, I'll continue to follow them, as they seem, in practice, to work a bit better than do the other buy-sell signalers for the time frames that I trade.