Friday, August 08, 2014

The Bollinger Balance: Tracking Stock Market Strength and Weakness

Recent posts have focused on ways of gauging broad market strength and weakness by tracking the wide range of individual stocks, rather than by relying solely upon a stock index.  These market gauges include the percentage of stocks trading above their volume-weighted average prices; the upticks and downticks among all stocks trading in the U.S; and intraday new highs and lows among U.S. stocks

Such measures provide several advantages.  First, they are a check on the action of the capitalization-weighted stock indexes, which can appear strong or weak simply because of the action of a relatively small number of highly weighted shares.  A good example of this was the runup to the July 24th highs in the large cap market (SPX).  My measure of fresh three-month new highs among stocks listed on major exchanges was 636 on June 9th; 836 on July 1st; and 363 on July 24th.  That waning upside participation as a rally matures is a useful way to gauge the relative health of the market move that you can't get by looking at the chart of the index alone.

The second advantage of these measures is that they provide prisms through which I can view and understand the market.  This is where market analysis meets trading psychology.  I download, archive, and review all of these indicators every day and then on a larger picture basis every weekend.  Day after day of seeing the patterns in the data--and the relationships among the measures--provides an insight and feel into markets that is useful deliberate practice.  

Above is yet another market measure I look at daily that I've dubbed "the Bollinger balance".  (Credit to John Bollinger for insights into this indicator and to the Bollinger data tracked on the excellent Stock Charts site.)  In this measure, I simply take the difference between the number of NYSE stocks that close above their upper Bollinger Band minus the number that close below their lower band.  What I'm looking for is whether we see signs of expanding strength vs. weakness among the broad range of shares.

You can see from clicking the chart above that we saw a declining Bollinger balance from early June through later July as the market was topping.  This divergence, along with the many sector divergences and divergences in the new high/low data, was identifying the waning participation to the upside--a useful heads up that the rally was losing steam.  

Fast forward to the present and you can also see that the Bollinger balance has now been waning to the downside, even as we've made new lows in the major indexes.  We're also seeing fewer shares making fresh three-month lows over the past several sessions.  This suggests that selling is waning in terms of breadth--a potentially useful heads up for traders gauging the present market correction.

Further Reading:  Archived Posts on Market Indicators:  Volume One; Volume Two; Volume Three; Volume Four