I'm at work creating an indicator that tracks upside and downside momentum within a basket of large cap issues as a way of gauging overall market strength. The basket contains 17 stocks that are highly weighted within the S&P 500 average and/or that represent key sectors of the S&P 500. These include consumer stocks, cyclical issues, financial companies, and technology shares. I have found in the past that tracking the number of stocks within the basket that make new highs or new lows in a given intraday time period (e.g., the past 2 hours) is very useful in detecting valid breakouts vs. false ones. The total number of stocks making new short-term highs minus new short-term lows, plotted as a cumulative total, also works well as an intraday trend measure.
My new project takes the methodology from the Demand/Supply Index (summarized each day on the Trading Psychology Weblog) and applies it to the basket of 17 issues. Thus, at the end of each day, I count the number of stocks in the basket displaying positive vs. negative short-term price momentum. At the end of Monday's trade, for instance, we had 8 stocks with positive momentum and 9 with negative. I will begin reporting this statistic on the Weblog as well, with the idea of eventually testing it for historical patterns here on this blog.
While the specific composition and sector weighting of my basket remains proprietary, my hope is that this work encourages readers to monitor more than the individual stocks or indices that they are trading. The breadth of market moves plays an important role in their continuation or reversal. An alternative to my basket would be a close monitoring of sector ETFs, their new highs/lows, momentum, etc.