Apologies in advance for the very busy chart. If you click on the chart, the data will be clearer, and the explanation below will help in making sense of the indicator.
The basic logic of the indicator is contained in my prior post; we're looking at where each stock in a basket of 40 closes relative to its prior day's range. If the stock closes above the high of the prior day, we label that stock as short-term bullish; if the stock closes below the low of the previous day, we label it bearish. That is because, day over day, we are accepting value at higher or lower price levels. If the stock closes within the prior day's range, we label its short-term trend as being in a range.
First look at the red line, which is the number of stocks in the basket qualifying with bullish readings. We see the liftoff--broad bullish momentum off the July lows--and now the dwindling readings as the market appears to be in a consolidation/topping mode.
At the same time, we can see from the yellow line that the number of stocks with bearish readings has been creeping higher and recently has been exceeding the number of shares with bullish status. Observe how the number of stocks with bearish (yellow line) readings peaked ahead of the market bottom in July; this behavior is similar to what we saw in our recent look at five-day new highs and lows.
Finally, if we focus on the light blue line, we can see the elevated number of stocks trading in range mode, a useful alert to the recent consolidation/topping that we've been seeing in the S&P 500 Index (SPY; dark blue line). It is not unusual to see a peak in stocks trading in range mode ahead of market reversals, as happened at the July lows.
Note that Friday, which started out looking like a trend day to the downside, actually qualifies as a range day, as we had two stocks bullish, eleven bearish, and 27 closing in Thursday's range. That tempers my expectations for Monday and will have me watching how we open relative to Friday's trading range.
Seeing what is happening in broad market averages can help us gauge action in individual shares, given that most stocks are correlated with the indexes. What we're seeing in the recent posts, however, is that the reverse is also true: the behavior of a cross-section of stocks in a basket can illuminate what is happening in the broad market.
Creating indicators of this type offers a quick way to obtain a bottoms-up view of market behavior. I will be posting more of these indicator readings to the blog and updating readings via Twitter. The Twitter feed is free; you can follow the last five tweets on the blog under "Twitter Trader" or you can follow the entire stream here.
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3 comments:
Hi Dr. Brett,
Looks like your long trip hasn't had any negative impact on your productivity. Your work is always greatly appreciated. On a somewhat related subject to your post, using the prior week's A/D ratio to determine probability of hitting weekly P, R1, R2, S1 or S2, for example if previous week number of decliners > advancers, 70% of the time the previous week's low will be taken out. Do you use the Friday closing 5 DMA of advancers vs. decliners to determine probabilities of hitting R or S points in the new week? If so, that seems to line up with this chart as the last four weeks have seen a swing from approximately a 2:1 A/D ratio to last week's 14:16 ratio, which also looks like a POTENTIAL shift.
Thanks in advance for any help on this. Best regards and thanks for all your help.
Dear Brett,
Thanks for sharing us.
In order to learn how to fish...I would appreciate if you can tell us how did you build the indicator (using excel or other software like trade station)?
Thanks
Inspired by the previous post, I used Worden's StockFinder 4 to create this indicator on my own. Here's a screenshot:
http://i30.tinypic.com/260vkhu.jpg
The first pane below price shows the number of stocks in the SP500 closing above the previous day's high versus those closing below the previous day's low. The pane below that may appear identical, but it's an attempt to build upon the thoughtful comments of Matt Fahmie on volume. I simply took the first indicator and added a requirement that volume also increase from the previous bar and replotted.
While the shape of the resulting indicator it virtually identical (with some noteworthy and potentially valuable variances), what I find interesting is the mathematical difference between the two measures. For example, the move off of what became the March 10th bottom showed 396 stocks in the SP500 closing above the previous day's high, while 312 of those did so with higher volume over the previous day; a move showing very good volume participation. In contrast, the March 23rd pop showed a 431 figure in the top pane with only 174 in the bottom, suggesting that while a vast majority of stocks were moving higher, less than half were doing so on higher volume which would indicate some degree of fatigue.
My approach to identifying range conditions is slightly different than those described by Dr. Steenbarger's previous post. I simply colored price yellow on the days in which both new range breakouts and breakdowns totaled less than 125 each. One observation I found was that when this condition was true, it was often a result of a previously dominant short-term trend in breakouts or breakdowns reaching maturity. It seems to give a heads-up that either the bulls or bears have halted their broad-based push and that the established short-term trend may be vulnerable.
As always, and especially lately, these posts have been getting the gears turning for me. Thanks for your work!
Ryan
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