Saturday, December 20, 2008

Range Bound Market: A Different Look at Market Trending

I have posted in the past about my proprietary Technical Strength measure, which assesses short-term trending of stocks in a manner analogous to a goodness-of-fit regression line. In the chart above, I've taken the 40 S&P 500 stocks in my basket (five of the most highly weighted stocks within the eight sectors that I track each week) and divided them into five categories based on Technical Strength: strong uptrend, moderate uptrend, neutral (non-trend), moderate downtrend, and strong downtrend. By posting bars for Monday through Friday, we can see how the trending behavior of the basket evolved over the week.

What we see is that we began the week with more stocks in uptrends than downtrends, though no stocks were in strong uptrends and eight were in strong downtrends. The majority of issues, however, were non-trending, indicating a mixed market. By Tuesday, half of the stocks registered moderate uptrends and eight were in strong uptrends, as the S&P 500 Index broke above its 900 level of resistance. For the remainder of the week, stocks in uptrends dwindled and neutral (non-trending) stocks increased, as the S&P 500 Index fell back into its range. By Friday, the market was clearly in non-trending mode.

Distinguishing between strong and moderate uptrends/downtrends provides useful information, I find. In a solid trending market, half or more of the stocks in the basket will qualify as being in strong uptrends or downtrends. After the upside breakout early in the week, only 20% of the stocks in the basket qualified as being in a strong uptrend. I strongly suspect that similar categorical breakdowns of trending within stocks in specific sectors would provide useful data for traders.

Because I find value in this breakdown, I will post the trend category status of my basket each morning before trading days via Twitter. Subscription is free and available on my Twitter page, or you can simply read the last five posts on the blog home page under "Twitter Trader".