Tuesday, March 24, 2009

A Fresh Look at Advance-Decline Statistics

As I mentioned in the previous post, one of the new indicators I'm rolling out for decision support is an advance-decline measure that tracks the movement of stocks from their opening price rather than from the previous day's close. Specifically, I'm tracking price movement from the market open for 40 highly weighted stocks equally divided within eight S&P 500 sectors. This is the same basket of stocks that I track in my morning Twitter posts with respect to trend status.

As luck would have it, this revised advance-decline measure was helpful in today's trading of the ES (S&P 500 e-mini index) futures. The market opened considerably lower from its prior day's close, which gave us a very negative reading for the traditional advance-decline indicator. When we looked from the market open, however, we saw a much more mixed performance, as noted in the intraday Twitter posts. Indeed, even when the ES futures were trading below their open during the early morning, there were more stocks in the basket up from the open than down. This told us that the S&P 500 Index was not as weak as the traditional indicators might suggest, keeping us from selling into early weakness.

(Conversely, we obtained consistently negative readings from the NYSE TICK during early morning trade, reflecting weakness of the broad market relative to the S&P 500 large caps. That weakness served as a caution regarding chasing strength. In a trending market, indicators will tend to tell similar stories. It's when sectors are moving in different directions that we get mixed, inconsistent readings from indicators, a helpful tell that we're in a range market.)

In a trending market, we should see the vast majority of stocks trading above or below their opening price. We should also see major sectors moving in unison. When there is mixed sector performance and a mixture of advancing and declining stocks (as computed from the open), it is a worthwhile indication that we're in a non-trending environment. This revised advance-decline measure should also be helpful in identifying when range markets breakout and become trending ones (the great majority of stocks should flip to advancing or declining) and when those breakouts are false (the majority of shares fail to sustain advancing or declining status).

I'll be tracking this indicator in future intraday Twitter posts (free subscription here, or check the last five tweets posted on the blog page under "Twitter Trader") and including it as one of a core group of measures that becomes part of my eventual "daytrading analyst" resource. My hope is that it will be helpful in teasing out when large caps are under- or outperforming and when action from open to close is different from action measured from close to close.