Tracking the Breadth of Market Strength and Weakness

I thought I would share a continuing work in progress.  This is composite index of all NYSE stocks giving buy vs. sell signals for two different technical systems:  Wilder's Parabolic SAR and Bollinger Bands (raw data from Stock Charts).  The chart above tracks a 10-day moving average of the index.  The index provides a general sense of "overbought" and "oversold".  Interestingly, the overbought readings do not lead to reversal on average.  Rather, if we look at the strongest half of signals since June, 2014 (when I began assembling these data), the next three days in SPY have averaged a gain of +.24%.  When we look at the weakest half of signals, the next three days in SPY have averaged a gain of only +.01%.  When many stocks are producing buy signals, there tends to be short-term upside momentum.  When many stocks are producing sell signals, on the other hand, we want to be on the lookout for potential reversal.

Note that we've been seeing overbought and oversold levels in the index at successively higher price levels.  That is what we would expect in an uptrend.  Where I've found the index to be particularly useful is in identifying momentum peaks that tend to precede price peaks during intermediate-term cycles.  The index has also been useful in identifying when we are getting buying interest coming out of oversold levels.  That is what we've been seeing most recently.  I like these kinds of measures, because they tell you how much distinctive strength and weakness we're seeing across the broad range of stocks.

Further Reading:  Identifying Trend Days
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