powerpoint 6: Measuring Market Strength Flashcards
Divergence Analysis
When oscillator/indicator peaks/bottoms fail to confirm price peaks and bottoms
the most successful method over the past 50 years of warning of a major market top
negative divergences
Best way to measure internal strength of the market index
Advance – Decline (Breadth) Line
The cumulative sum of advancing issues minus declining ones
Advance – Decline (Breadth) Line
for what can Advance – Decline (Breadth) Line be constructed for?
Can be constructed for any index, industry group, exchange, or basket of stocks
how is Advance – Decline (Breadth) Line calculated
Calculated daily, weekly or any period
to what is Advance – Decline (Breadth) Line not applicable?
not applicable to commodities
why should the Breadth line follow and move to new highs and lows with the stock market index, (i.e like Dow Theory averages confirming each other)?
if not, there is a divergence, which will lead to a price reversal
Breadth Differences
Net advances-declines, with –ve or absolute value
Not useful
why are Breadth Differences useless?
because parameters must be adjusted for increase in issues traded
McClennan Oscillator
The difference of 2 exponential moving averages (19 & 39 day EMAs) of advances – declines
In the intermediate term, shorter term shorter moving averages rise faster than longer term ones
McClennan Oscillator
when is a security overbought?
+100 to +150
McClennan Oscillator
when is a security overbought?
-100 to -150
McClennan Oscillator
what should we look for when trying to find divergences
a market rise with lower top in MCO is suspect. Opposite true at bottoms
McClennan Oscillator
what does the first overbought level indicate?
intermediate term rise higher, not a top
McClennan Summation Index
Measure of the area under the McClennan Oscillator curve by accumulating the daily McClennan Oscillator figures into a cumulative index
Oscillates between 0 and 2000, neutral is 1000
Ratio adjusted Summation Index (RASI)
used to factor for increases in number of issues, and oscillated between +500 (overbought) and -500 (oversold)
Breadth Thrust
inventor
Martin Zweig
the most common indicator
Breadth Thrust
how does the Breadth Thrust work?
calculating a 10 day SMA of advances divided between the sum of advances and declines when the indicator crosses zero and goes above 0.61
–> The technician must frequently review the accuracy of these parameters
Arms Index
inventor
Created by Richard Arms Jr
how does the Arms Index work?
Measures relative volume in advancing stocks versus declining stocks
Large volume in declining stocks, market likely at a bottom
Large volume in advancing stocks, market is healthy
Arms Index
formula
(advances / declines) / (advancing volume / declining volume)
90% Downside Days (NPDD)
inventor
Paul Desmond
90% Downside Days (NPDD)
purpose
Reliable way to identify major market bottoms
when do 90% Downside Days (NPDD) occur?
Occurs when on a particular day the % of downside volume > total of upside and downside volume by 90%
the percentage of downside points exceeds the total of gained points and lost points by 90%
when does a 90% upside day occur?
when both the upside volume and points gained are 90% of their respective totals
90% Downside Days (NPDD)
findings
A NPDD in isolation is a warning of potential danger ahead suggesting investors are in a mood to panic
A NPDD after a new market high is just a correction
When 2 or more NDDD occur, additional NPDDs occur, often 30 days or more apart
Big volume rally periods of 2 – 7 days often follow a NPDD and can be profitable for agile traders
A major reversal is signaled when a NPDD is followed by a 90% upside day (NPUD) or two back to back 80% upside days (within 5 trading days from the low) The longer it tales for the NPUD, the more skeptical you should be
Be careful when only one of 2 NPUD reaches 90%.
–>Such rallies are usually short of what is needed
Back to back NPUD are rare and long term bullish
Hindenburg Omen (HO)
purpose
Signals a reversal downward and potential crash in the market just like the Hindenburg blimp crash
Has a very good track record, always occurred before a major crash, but some false signals too
