Sunday, August 23, 2009

Breadth Indicators 08/23/09

Breadth Indicators are suppose to involve the Advance - Decline Line. The theory is that if a trend is not broad based (the majority of stocks are not moving in the same direction as the overall market) then the trend is weak and may reverse. However, like all theories, there are many instances where reality likes to prove theory wrong.

You can construct an A/D Line of any market, such as the 30 Dow stocks, the 500 S&P stocks, or the 100 NASDAQ Stocks. But the one that I like to use is the NYSE Advance - Decline Line.



In the chart above, I compare the 10-period SMA of the (H+L+C)/3 of the NYSE Adv - Decl Line with the 50-period SMA. I also look for divergences of the 10-period SMA with the S&P 500 Index. A divergence, however, does not always indicate a market reversal. I find that the divergence is more reliable when indicating a possible end to a correction against the overall trend. A divergence with a strong overall trend is not as reliable. But it is a good indicator of possible momentum changes.



I also like to apply a 10-period SMA to the daily NYSE Adv - Decl Line and the TRIN indicators. The TRIN is bullish when it is below the average, and bearish when it is above the average. You can use this in several ways. It can confirm intraday bullishness or bearishness. However, it can also indicate strength in a trend. When the market is in a strong uptrend, and you have a day when both the Adv - Decl Line and TRIN are bearish, but the market does not make a lower low than the previous day, the next day will probably be a strong up day. The same holds true for a downtrending market. Also, these indicators sometimes lead the market by a day indicating a change in momentum in the cash market. These are subtle clues that sometimes help you to anticipate upcoming moves in the market.



Discretionary Stocks are considered more risky than Staple Stocks. Looking at the Discretionary / Staples Ratio can sometimes indicate a change in underlying sentiment. However, like all indicators, it can sometimes give false signals.



Above is Dr. Steenbarger's Cumulative $TICK Indicator. I liked this indicator at first, but I seldom use it anymore. I find that it simply confirms what the price is already telling me. I prefer divergences to indicate possible changes in momentum. This indicator will give a divergence, but seldom.



I think that applying a 20 and 50-period EMA to the 15-minute $TICK chart is a better indication of momentum. You will get more frequent, and possibly better quality divergences using these averages applied to the $TICK. These divergences simply alerts you to a possible change in market direction.
Charles


1 comment:

  1. Excellent thank you for this informative post!

    ReplyDelete