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.


Matthew C. said...

I love the idea of tracking intraday A/D and other stats instead of from the previous close.

Also, this twitter post you linked to was very interesting.

In summary, evidence suggests that simple win-loss percentages from recent trades influence the future trading behavior of individuals, especially inexperienced traders, far more than does past bottom-line level of profitability of trades. Individual traders may want to consider whether they are motivated more by being right than by making money.

This is certainly the case in my experience.

For me, rather than constantly fighting my own natural human responses to trading events, I have structured my trading to operate in congruence with my psychological reactions.

In my case, this means scaling into and out of trades to buy dips and sell rips, which smooths out my P&L curve over time, reducing losing trades, days, and drawdown amounts, while reducing many of my home-run trades to triples or doubles.

Since for me one of the biggest factors in my trading success is avoiding stupid emotion-driven trading, it is worth sacrificing the absolute optimal trading strategy for a computer (which might be fine with an average monthly maximum drawdown of 5-10%) in order to trade in such a way that my mental machinery hums along (avoid drawdowns much larger than my average daily profitability, please, so my monkey brain doesn't blow up my trading!)

Great stuff as always Brett. Oh, and go Blue Devils (from my horse farm a few miles from Tobacco Road).

jarret said...

I just wanted to thank you for your site. I am a relatively new trader and have learned a ton from reading your site and Twitter comments. It is very much appreciated.

dan said...

have you changed the basket of 40 stocks since the drastic change in market capitalization over the last year? If so, could you kindly post or refer me to the updated list?



Mark Wolfinger said...

In a trending market, we should see the vast majority of stocks trading above or below their opening price."

Is this true?

As a non-technician with >30 years as a trader/investor, my gut feeling is that when markets open lower, there are too many sellers 'at the market' and thus, opening prices are lower than they 'should be.' That tends to result in many stocks ticking higher.

Similar situation occurs when market opens higher.

Thus, it seems to me that prices are likely to move nearer to unchanged levels.reverse the opening.

Is that 'feeling' disputed by the facts? Especially when the market is trending?


TTmarun said...

great tweets today Dr. Brett, the opening post lined up with my take on a mixed mkt & not much large interest trading. (which surprised me cause the level price was trading at the open) great info & insights, looking forward to trusting yur reads!! just kidding!!to release me from constantly scanning of the larger picture.... pain in the butt & distracting as yu mentioned.

i 2 screens i use in neoticker with yur ideas in mind, one for the 40 stocks. I reduced the 40 stocks to 8 different indicies made up with the 5 stocks in each group as individual charts & a quote page with all 40 stocks using opening price as green/red light, for a quick count & reference. i've been using this setup of yurs for years, extremely valuable reads especialy for determining trend vs range opens/ days..

I look forward to future sessions like today i could use a co-pilot too!!! yur the best my man..
thx JT