Saturday, April 18, 2009

Integrating Indicators for a Multifaceted Market View




As the stock market (SPY, blue line) has moved higher, we've seen a steady expansion of new 65-day highs vs. lows (top chart), even as 20-day highs minus lows have leveled off at high levels (middle chart). That tells us that a large, but not expanding number of shares are making shorter-term new highs, but--among that group--an increasing number is registering fresh longer-term highs. It's when we stop expanding the new high/low balance at both time frames, as happened early in March, that we're most likely to see trend reversals of note.

Meanwhile, we can see a more sensitive indicator, Demand minus Supply (bottom chart). This is an index of the number of stocks closing above vs. below the volatility envelopes surrounding their short-term moving averages. This captures momentum quite nicely; it's common to see downside momentum trough ahead of price (as happened prior to the early March bottom), and now we're seeing that upside momentum has peaked ahead of price.

When we put the indicators together rather than view them in isolation, we develop a more nuanced picture of a strong market that is slowing down. That's part of the structural view of markets noted earlier. The above indicators are part of the morning Twitter posts that are part of my market preparation for the day; subscription to the Twitter feed is free, and the most recent tweets appear on the blog site.

4 comments:

JimRI said...

I really appreciate your blog and comments. I have in fact purchased your latest book,"The Daily Trading Coach," and will be reading it today.

sidney said...

am reading your book "Enhancing Trader Performance" page 106 and came to your website for the first time
thank you
sid holec, md

Centurion Holder said...

how do you calculate supply and demand? really like the charts

Brett Steenbarger, Ph.D. said...

Hi Centurion Holder,

Demand and Supply are calculated for all NYSE, NASDAQ, and ASE stocks and reflect the number of issues that close above and below the volatility envelopes surrounding their moving averages (like a Bollinger Band, but with a proprietary wrinkle).

Brett