Lecture 6(2) - Measuring Market Strength

Market Breadth Indicators

• Measures internal strength of the market by considering whether stocks are gaining/losing strength in price

• Why - Breadth leads price

• Advance-Decline (A-D) Line, A-D Ratio, Breadth Difference, Breadth thrust

Advance-Decline Line (A-D)

• Best way to measure internal strength of the market index

• Cumulative sum of advancing issues minus declining ones

• It should follow and move to new highs with the index for confirmation - if not, there is a divergence which will lead to a price reversal

A-D Tip

Look for 2 consecutive negative divergences - double negative divergence signals a peak within a year

A-D Breadth Line

McClellan Oscillator

• Difference of 2 exponential moving averages (19 & 39 day EMAs) of [advances - declines]

  • Difference between advances-declines

• Overbought: +100 to +150

• Oversold: -100 to -150

• Zero line cross is also important

McClellan Summation Index

Measure of area under the McClellan Oscillator curve by acucmulating the daily McClellan Oscillator figures into a cumulative index

• Oscillates between 0 and 2000, neutral is 1000

• Ratio adjusted Summation Index (RASI) is used to factor for increases in number of issues, and oscillated between +500 (overbought) and -500 (oversold)

McClellan Summation Index Graph

Advance-Decline Ratio Graph

A-D Ratio

Number of Advancing issues

Number of Declining issues → and smooth it over a time period → a ratio above 1 shows that more stocks are advancing than declining

Breadth Thrust

10 day SMA of advances

(Advances + declines when it goes above 0.61)

Arms Index

• Measures relative volume in advancing stocks vs declining stocks

• Interpretation: large volume in declining stocks, market likely at bottom. Large volume in advancing stocks, market is healthy

  (Advances/declines)

  (Advancing volume/declining volume)

• Arms index ABOVE one means a declining volume and price is leading the market

90% downside days (NPDD)

• Reliable may to identfy major market bottoms

• Occurs when on a particular day the % of downside volume > total of upside and downside points exceeds total of gained points and lost points by 90%

• A 90% upside day occurs when both the upside volume and points gained are 90% of their respective totals

Up and Down Volume Indicators

• Net new 52-week highs and Net New 52-week lows

• When stock market index is rising, most individual stocks should be rising to new highs, when the market index is declining, most stocks should go lower and make new lows

Up and down volume indicators graph

Hindenburg Omen (HO) → part of Up and Down Volume

• Signals a reversal downward and potential crash in the market just like the Hindenburg blimp crash

• Rare technical signal, attempts to predict crashes

• Must meet conditions

Conditions for HO to go off

• 52 week highs & lows each have to be greater than 2.2% of stocks

• Small number of new highs or lows > 75

• 10 week moving average of NYSE comp is rising

• McClellan oscillator is negative

• New highs cannot be >2 x of new lows

• Confirmation: 2 or more occurences within a 36-day period

Using Moving Averages

• Number of stocks >30 week moving average

• Looking at how many stocks are trending by seeing if their price is above a N-day moving average