http://dailyoptionsreport.com/blog/post/vxx-review/
how do i make a comment. seriously.
it's not as intuitive as you would think...
Sunday, May 23, 2010
NYSI with slow STO
Two weeks ago, Dave shared with us a chart of the $NYSI (click here). He used slow STO 5,3 over the NYSI to see if it would give him reliable signals in the SPX 500. I keep it no secret that I am reluctant if not against using any such indicators over the SI because I believe it is flat out wrong (click here for how I interpret and use this important indicator).
That said, when I saw it first, I was sold on it. There were very few if any whipsaws. This is where my antenna went up but first before I buy something, I have to find any possible way to discredit it. If I can't find anything, then I am a buyer. So I decided to test its signal reliability as much as I know of. I started by improving it a bit as you see below and have been watching it since then.
1. The chart's time frame is weekly so it is for swing traders. Important!
2. I changed the SPX to OHLC chart to find out the close as a return measuring point.
3. There are two thin blue lines for STO, one at 80 and another 20. I excluded any rendered signals occurred between these two lines to reduce noise or whipsaws.
4. I put sell signal (red arrow) - buy signal (green arrow) at the CLOSE of SPX when STO gave buy or sell signal. That generated 20 trades. Successful ones are in blue boxes (10), losing trades are in red boxes (8), ans neutral trades are in pink (2).
1. In the bear market, sell signals were more reliable and rewarding than buy signals while in the last rally, buy signals were the ones more reliable than sell signals. Keep in mind that the rally uptrend is not broken yet. We had reliable BUY not sell signals for this period. So it is profitable and rewarding (so far) for one to go with the trend using this STO indicator than against it. If a sell signal started again to provide reliable and profitable trades then that might be a good signal that the trend changed from up to down.
2. While we had only 50% successful trades, I am sure I can see that the losses were small while the gains were large. For more accurate data than just visual, it is better we use actual numbers. I wasn't following this chart during these signals to be sure of when the signal was exactly rendered but you can go and collect the close of each trade of those twenty trades to get the actual return of each one and their average.
3. To improve reliability, I even went and added other indicators to see if I can increase the accuracy of the entry and exit and thus increasing the number of successful trades to improve the ratio to more than 50%
Here is the meat - As of the close of Friday last week, the STO in the chart above gave sell signal. Sell signal means that the previous long swing position should be closed and a short swing position should be opened at the same time.
It was a successful long position based on that signal. Will it be as successful for the short position that was opened SPX500 @ 1136.03? Time will tell and I will keep you posted in "The Hub". I just wanted to share with you my finding and thank Dave along the way.
For updates to this indicator's long and short signals, click here. What do you think? Can you make this chart better?
For more live charts, calls, and links, keep The Hub on your radar. It is fully operational now.
Current SPX 500 @ 1136.03 and DOW @ 10609.65
Volume Analysis
A. Volume Quantity:
Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversely, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded).
- Richard Russell
B. Volume Quality:
Unlike, for example, the 2003 rally where NYSE Up/Down volume ratio advanced in an upward slope with the rally, this 2009 rally especially the second part of it is showing a low quality by the evidence of the declining ratio and its 20DMA slope that doesn't fit (at least for now) as a start of a new bull market. It rather suggests a correction at best and who knows at worst. Also, both the up volume on its own is declining while the down volume is holding steady and refusing to make a new low. A bearish divergence in the face of rising prices.
C. Volume comparison to previous bull markets:
It is 101 trading/investing lesson. Without volume, the move (up or down) is suspect. Click here and here for two well-thought and researched articles by William Hester from the Hussman fund about the topic. The first article noted that trading volume separates bull markets from bear rallies where bull markets have typically begun on strong volume after selling had become exhausted. New bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume.
This rally lacks that important quality.
The second article not only update the first but also shows us that when you adjust the trading volume data for a handful of mostly lower-quality financial stocks, the picture of the 2009 rally gets worse. On a Phoenix-volume adjusted basis, NYSE share trading is at the lowest level in years. Healthy bull markets, even if not during the earliest days of a rally, will typically recruit growing amounts of investor interest and expanding levels of volume as prices rise. Expanding volume continues to be an important characteristic missing from this rally. Below is a chart from the second article. I enhanced it for you to get the point across quickly:
Until next article and as always, I wish you as much as you wish for yourselves and even more.
GoodVibe
Mr. Lucky
All of us know first hand how our individual psychology as well as social psychology plays great role in our trading and investing decisions. There is no better time to understand this easily more than time of bubbles and busts. Cheer confidence boarding on arrogance at the top and complete absence of it that is boarding on utter dismay at the bottom. Most of us suffer this and few are exempt.
In trying to understand the latest and not too surprising gold euphoria after breaking the $1000 magic level (same happen to oil when we broke that $100 level) to gauge the current psychology behind it and compare it to the previous one in 2008, I went to read the recent blogs of TMFSinch who easily can be thought of as extremely bullish on precious metals if not a gold bug. No pun intended. Although I wasn't planning to share my findings so I don't create any fractions, I changed my mind and thought it is very valuable to share and a must read if you are really thinking of jumping into the bandwagon of precious metals for whatever reason you came to that decision.
I respect Sinch's sincere efforts towards sharing his research with others and even overlooked his not too tolerant attitude towards my disagreement (right or wrong) with his calls especially the one about gold will NEVER go below its 2008 low let alone now under $1000.
He might be completely right, which I told him many times but certainly there is a chance that he can be wrong.
He doesn't think so AT ALL. No chance in his mind and he will proudly tell you so. This mindset qualified his psychology "through his blogs" for this article. This is not a personal analysis of his character. I don't know the man. This is an evaluation of his "investment psychology", which doesn't take anything away from his character as a person.
First let me be clear that I don't recommend buying or shorting anything. I only share the tools that I use in hope it adds value to your thinking and tool-box. When I share that I am shorting or buying something, I never ask anyone to do the same. I only use it to demonstrate. For disclosure, I stopped trading gold after my successful call in February 2009 top and shifted course to silver, which didn't disappoint me so far. After the latest euphoria in miners, I went back and shorted them through GDX and still hold my position.
Know that all my writing about gold and silver is to share my worry about many people buying into the herd mentality currently present in Precious metals especially in miners and buying at what I believe to be unsustainable prices in upcoming deflationary phase. All I ask of you is just step to the side from the sector and wait. If I am wrong, all you will miss is an opportunity but if I am right, you will be in a better position to load the wagon at better prices and terms with far less risk than currently present.
If you had the insight and luck to capture this great move to the upside from lower level, good for you. Time to reduce your positions sharply and lock your profit. When Bullish sentiment for gold is above 90% for more than 20 consecutive days extreme record and silver bullish sentiment at near record extreme 95% according to DSI, then I believe time to hit the exit and leave whatever left if any on the table. Be grateful, fearful, and not greedy.
On the other hand, Sinch is on a crusade for salvation from the US dollar towards the promised golden land. He is urging people so passionately to jump into the train NOW before it passes them. If he will be wrong, it will be extremely costly endeavor because of his bullish investing in miners as it was the case in 2008.
I hope when you will read what his stance back in 2008 gold euphoria was, you will understand how psychology and fear of missing can cause great damage beyond repair. The following is what he advised others to do at similar extreme zealous bullishness not far from or different than the current ones. It ended in a quick reversal for those who started their positions at the top and can end the same way now. Those who were stubborn enough to hold on their losses, they are barely breaking even today if not under water after two years of investing in the over-rated miracle sector since early 2008. If they decide to start the course again at these levels, they might have a painful redux experience.
Only time will tell who was prudent and who was not.
Never forget - Price is the arbiter of all matters when it comes to financial decisions. No matter how great your thinking or analysis is, it ain't worth a thing if the price won't match it.
...........
April 18 2008 - Gold @ top $930 - "Final Dip of the Precious Metals Correction - all aboard for $1,200 gold"
July 11, 2008 - Gold @ top $960 - "Major Breakout for Gold! Got Gold?? Gold broke through major resistance this morning at the $950 level... actually it pounded through it.. pushing well into the $960s!! Silver flirted with $19. The gold correction which began in March is all but over, with only minor resistance remaining at the $990-$1000 area before we march up towards $1,200. Got Gold?????? Got Silver?????"
July 13, 2008 - Gold @ top $955 - "Enormous Inflow of Investment Capital into Gold this Week - Chart of GLD Holdings Says it All... Got Gold?"
November 30, 2007 - "NovaGold [@ $9.61]* is my personal screaming buy of the week! I think anything under $10 is dirt cheap for this stock!"
January 03, 2008 -"When I posted the above note, NG had fallen from near $20 to about $9. In the ensuing weeks, it was beaten down to truly ridiculous levels, bottoming out with the clearest bottom I've ever witnessed. I bought in HUGE in this company at $6, and a week later it's back up to $10 (1/3/08). Some reading this might think the opportunity has passed, but what I wrote weeks ago remains just as true today... NG is a terrific value near $10 as well. It's going back to $20, as the deal which fell apart because the project was considered too expensive will be reconsidered shortly in the context of a new set of realities for spot gold. The project metrics with Teck Cominco were calculated based upon $650 gold, and it failed to impress by a narrow margin... this project becomes considerably more attractive with gold sustained over $800, and especially over $900 where it will soon be! Buy buy buy... and especially if market players are able to bat this one down once again... if it retreats to $9 or less.... back up the truck... this one's going to the moon! Easy double..
April 15, 2008 - "NovaGold [@ $7.54] Swings to Profit - Still Time to Get In"
.....
While gold was near all time high of $1000 back in 2008, the above statements, which are not selective or biased but a representative sample from the tens if not hundreds of calls to urge people to jump in at these prices calling it "the last possible cheap prices to buy precious metals and miners".
The results for these calls?
Gold kept falling until late October to $681, silver to $8.40, and miners were literally wiped out (see a chart at the end of this article for your return on investment if you bought and held with these calls as a euphoric investor did and proudly advised everyone else urging them to do the same).
*NovaGold (chart above) went as low as 45 cents (Yes! You read that right. Less than half a dollar!) from top $21.91 on November 05, 2007 less than three weeks earlier from the bullish call @ $10. That means it was slashed to half in less than three weeks and then followed up to accumulate 95% loss from the cheap $10 mark until it bottomed in December 2008. Frankly, I am not sure how many people who bought @ 10, 9, 8, 7, or even 4 dollars kept their position until less than 50 cents?
Hold to your mouse and keyboard for the following paragraph.
Best price for NovaGold since then is $6.81 just few days ago and current $6.05!!!! This is where the moral of the story even get more vividly enlightening. After two years, another bubble rally of 1600% from low 45 cents (chart), and the "great gold rush" to $1200 -guess what- a "dirt cheap NG" is still even dirtier. 50% below its recommended cheap price of $10 during the 2008 gold euphoria!
Catching my drift, dear brothers and sisters?
If you avoided buying the top and instead stepped aside until the bubble phase is gone, then you would have the cash to buy as much as 25 to 50 times the amount of stocks for the same price! Not this only but also you will have the chance to gain as much as 1600% return. But if you were afraid to miss the express train to riches and got in @ $20, bought huge @ $10 and backed up the truck to load at $7 while the underlying assets (precious metals) are in a bubble phase, then today you are down 50% at best and worse the experience might broke your spirit and confidence, decided to sell at a loss of as much as 95%, and swore to never touch a miner or stock at that matter again losing the true opportunity for huge gains.
Same story can happen again from whatever your miner price is at right now.
.....
What about his current stance? The same EXACT tone and over bullishness.
November 25, 2009 - "The Unbelievable Bargain of Silver" [Silver @ $19 AGAIN!!!]
December 04, 2009 - Gold at $1200 -
"There is no bubble. Bull markets pause and correct ... corrections and bubbles ARE NOT THE SAME THING!!!"
"I could see this correction taking us to $1,100, or possibly even $1,050. $1,000 is possible, but only with a surprisingly strong dollar rally."
"I will begin nibbling in earnest near $1,100, while I would get more aggressive building positions at $1,050."
"I fear that those who just wait for $1,050 to get long again could easily be left behind."
.....
Uh! You just read it! Fear of missing!! Fear none, my friends. One of my trading and investing rules that I live by is "Opportunities are made up easier than losses. Don’t let the fear of missing trigger emotional financial decisions."
...............
What about his call on the dollar, which is one main reason why he is so bullish on gold and silver?
May 02, 2008 - [Dollar @ rock bottom LOW 72.60] -
"Counterspin: The US Dollar Index in Context. The Rally is Pure Fiction."
The [US dollar] chart clearly demonstrates that there is nothing unusual happening with the dollar right now... these minor consolidations have occurred at frequent intervals all the way down. Objectively I know that nothing fundamental has changed to create meaningful support here. This amount of spin being devoted to the dollar right now is understandable, but disconcerting. And to the extent that Fools alter their investment strategies accordingly, it is potentially injurious. Please be careful here, as this has all the earmarks of a massive head-fake.
........
Now, if this is my personal adviser, I would fire him. Plain and simple. Over bearishness on the dollar and Not heeding the signals that the dollar was bottoming is what caused major and serious unhealed injurious across the board. NOTHING was left alone. All went down, while the dollar skyrocketed to 90 in a massive move!How about his current position towards the dollar now?
November 24, 2009 - "Have we Crossed the Rubicon? The dollar and its diving." [dollar @ LOW 74.30 AGAIN!!!]
As he will so confidently will tell you, NO chance for the dollar to go anywhere but south until toilet paper becomes more valuable than it. Will we instead have even a stronger move in the US dollar than we had in 2008?
............
To illustrate the euphoria psychology, you need no more than his calls on other metals that was clearly and obviously in a HUGE bubble. Even more clearer than precious metals but he failed to recognize that because he was afraid to miss an opportunity than be prudent. All the hallmark of a euphoria despite what he might try to convince me with. Read for yourself a representative sample of his many recommendations.
July 08, 2008 - couple % points below the all time high of all industrial metals!!! -
"A painful blip on the screen for us commodity longs - This an incredible opportunity for Fools sitting on cash!"
I always try to keep at least SOME cash on the sidelines for times when the market becomes this irrational, but this time around I have no reserves to take advantage of today's incredible buying opportunities. however, today is about as obvious a buying opportunity as I've seen in quite some time. Bargains abound outside of gold and silver today, too. ACH under $27 even as Aluminum prices have cruised higher.
And coal? PCX under $120?? MEE down to $70 from its recent high of $95. Pretty much any coal name is a buy here, as higher coal prices will be with us through 2010 REGARDLESS of what oil does.
And metals recycling names... they never should have been included in this sell-off. They are all buys here... MEA, CMC, SMS, SCHN [see my recent blog post].
Big names like RIO at $31... ludicrous! Buy buy buy!
July 10, 2008 - "Copper Heading to Fresh Peaks on Strong Demand from China; Aluminum is a Coiled Spring!"
September 3, 2008 - "Joy Global quarterly results provide excellent confirmation the commodity bull remains strong!!!"
.......
So as euphoric investors do, they run out of cash AT THE TOP and then go to ask others to join them to buy, buy, buy! This is one reason why bubbles end in bust. Investors are over extended because they kept chasing until, well, they ran out of money. When the market pull the rug for whatever reason and many who have well established positions exit, the exit is too tight. There is NO more money to add and all longs will hope for is that somehow the slide will stop and their positions will revive. Once the euphoria trend breaks, shorts also will join the feast and later the psychology of despair will add to the mayhem when those who chased get their fingers if not arms and legs cut in front of their eyes and they decide to bailout at the wrong time to relieve the psychological pressure.
Do you want a proof? The following were the results for these calls to buy and hold while euphoria was the norm of the day?
Cooper lost 70% since that day and Aluminum lost whopping 87% until both bottomed respectively in December 2008 and March 2009. ACH went down from cheap $27 to $7.22 - PCX from most affordable $85 to $2.76 - MEE (from $95 to $9.52) - MEA (from $18 to $1) - CMC (from $34 to $6) - SMS (from $35 to $7) - SCHN (from $100 to $17) - JOYG (From $73 to $15). And for sure none of these cheap goodies and "fundamentally sound" -pun intended- ever saw these highs again until today (or will see anytime soon), not even recovered half of it and some are still 80% below that high!
We are not talking traders here. This was a buy and hold strategy with only 10% to sell when he feels these stocks are overvalued!! For sure there were never new highs ever more than that to sell into. It was down fast and furious from then.
...........
Now that I illustrated clearly to you how the euphoric investor thinks and how much damage can happen if you decide to join it, to put things into prospective, here is a chart that illustrate the foolish believe that gold, silver, and miners are better than the US dollar for the last TWO YEARS (the time frame for the calls above). You will see the return on investment in all four in one chart. It will be obvious that even with gold's parabolic move that will die as fast as it went up, the US dollar was in 2008, is in 2009, and will be in 2010 a better choice for prudent investors who wanted to safe guard their wealth, just on its own!!
Enlarge Chart - After you click scroll down the chart for all four
Here is another chart, which is not related directly to the topic of this chart but an eye opener. It is for those who believe that gold is a protection of wealth. According to this chart, if you put your money there, you would have lousy return of 73% after 30 years (all of it was in the last two and half years only). You could even barely break even if you put your money earlier than the limit of this chart!!! This is far lower than just putting your money in the SPX where you should get as much as 1250% return (without dividends reinvested).
Bloomberg had an article titled, "Gold Can’t Beat Checking-With-Interest 30 Years After Last Peak".
"Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On an inflation-adjusted basis, gold investors are still 79 percent away from getting their money back."
Think about it.. just checking account with meager safe bank account interest rate will beat your precious metal for the last 30 years! That said, I will say that dollar (due to inflation) rank as gold as lousy long-term investment and both are weapon of mass destruction to our wealth.
As usual, I hope this will find you and yours as much as you wish for yourselves. Be happy and remember to make a positive difference in someone's life.
PS. Please rate this article on the top
GoodVibe
Mr. Lucky
NYSE McClellan Summation Index (SI)
The NYSE McClellan Summation Index ($NYSI) is a derivative indicator from the McClellan Oscillator ($NYMO). Read this article first and this second before continuing. In these two articles, I explained that the MO itself is a derivative of the Advance/Decline (A/D) line, where the A/D line is a derivative of the raw data of daily Advances and Declines that can be found daily in most financial publications. So ultimately The McClellan Summation Index (SI) is derived from the number of advancing and declining issues in a given market. It’s not based on prices as most indicators are but based on advancing and declining issues of an entire exchange.
The McClellan Summation Index (SI) is obtained by summing up the daily values of the McClellan Oscillator (MO) resulting in daily accumulation “cumulative total” or "summation" of the MO daily value. We get it by adding the daily (MO) value (positive or negative) to the prior day's (SI) to get today's (SI) value.
Yesterday's SI Value + Today's MO value = Today's SI value
The Ratio adjusted NYSE McClellan Summation Index - Enlarge
A negative (MO) produces a lower SI. A positive (MO) produces a higher SI. The SI changes direction whenever the raw oscillator (MO) crosses above or below its own zero line. In other words, the SI rises when the MO oscillator is above its zero line and falls when the oscillator is negative below its zero line. The result is plotted as a slow-moving curve that oscillates in relation to a zero line (fluctuates above and below zero). Unlike the MO, its fluctuations are smoother and its zero line crossovers are less frequent.
Whereas the MO is used for short to intermediate trading purposes, the SI provides a longer-range view of market breadth and is used to spot major market turning points as well as projected long-term trends. The SI often gives more reliable long-term clues to market breadth than the traditional advance-decline (A/D) line or the MO. It’s a popular indicator with good track record that can be used on data as back as to 1920s. It can signals market turns and regarded by many* as an excellent indicator of the overall "health" of the market and the market's current trend.
Traditional versus "ratio-adjusted" SI:
The "traditional" calculation of breadth indicators, such as the MO and SI, begins with subtracting declines from advances, then continuing with the Oscillator/Summation calculations. As stocks have been added to the NYSE over the years, the MO and SI have become skewed to higher and higher readings and reaching greater high and low extremes over the years, but these new record highs and lows didn't accurately reflect the true internal condition of the market and making historical comparisons impossible. To remedy this, a new Ratio-Adjusted calculation** was adapted. The resulted chart differ greatly than the traditional one and produce different readings. You should be careful which one you're using or you'll get incorrect interpretation.
From this chart (click here), you can see that the traditional SI is blasting to historical highs. On the other hand, the ratio version, while obviously higher than normal, is still relatively unimpressive in the 76-year historical perspective (until 2002). The highest and lowest historical readings are still associated with the 1929-32 Bear Market.
Another example, let's compare the 1968-70 and 1998 Bear Markets, representing declines of about 36% and 20% respectively. Even though the 1968-70 decline was much more severe, the McClellan SI (traditional calculation) were -2252 for 1970 and -3526 for 1998, giving the false impression that the 1998 Bear Market was worse than 1968-70. Using a ratio-adjusted calculation the SI reading for the 1970 low was -2402 compared to the 1998 low of -1444, clearly reflecting the proportional relationships of the two bear markets, and making it possible to make an accurate historical comparison.1
What are the numbers to watch for?
The traditional SI*** normal range of movement fluctuates between Zero and +2000 (see this chart) although it can and does move outside of this range during extreme or unusual market conditions. Historical extremes are approximately +4000 and –2000 though in 2003 we broke the +6000 level and on March 2009, we broke the floor to hit below –4000. We came back from these extreme low levels to again break UP to above the +5000 level (another historical extreme) last month at an impressive total of 9000 points move from bottom to top. As of Sep. 11, 2009 we stand @ +4751.37 on the traditional SI.
On the other hand, ratio adjusted SI normal range of movement is between –1000 and +1000 (see chart below) although it can and does move outside of this range during extreme or unusual market conditions. Historical extremes are approximately +1500 and –1500 with exception to the great depression era when the extreme was +2000 and -2500.
The Ratio adjusted NYSE McClellan Summation Index - Enlarge
Why the SI is an important long-term market indicator?
The SI offers many different pieces of information in order to interpret the market’s action. One should not just pay attention to the numerical value of the SI, because understanding its chart structure offers much more insight and accurate analysis. In this article I will cover the interpretation of the “Ratio adjusted” SI as followed:
1. The direction of the SI movement, up or down is an indication of whether money is moving in or out of the market. A rising SI is positive for the market and a falling SI is not. A market is termed “neutral” at the zero level. When the SI moves below the Zero Line and stays there, it is a very negative sign and indicates that a possible long-term down trend is starting or underway and likely to become more severe putting the market into bearish status and territory. Movement above +1000 is considered a positive sign that puts the market into bullish status and territory.
Historical "Ratio adjusted" NYSE McClellan Summation Index (SI)
Courtesy of decisionpoint.com - Click chart to Enlarge
2. The true significance of the SI comes into play when the reading is outside normal range of -1000 and +1000 indicating an unusual situation in the stock market. Unlike many articles on the Internet that simplify the SI in numerical value that is not only wrong but also over simplification, I would like you to know that there are truly no clear "oversold" or "overbought" value or levels that can be used to forecast market direction or condition with great accuracy from this indicator. There are instances where the SI "oversold" bottoms have formed and were followed by continued selling in the market and lower SI lows.****
3. Top and bottom signals carry more significance if the index is also diverging from the associated market average or composite.
4. Historically, significant major market bottoms occur and could be anticipated after the index falls below -1000. initial first buy signals occur when a positive divergence forms from bearish territory readings creating a bottom formation and followed with a sharp, swift, and smooth upward from that bearish territory to bullish territory (above +1000). A second confirmed buy will occur with the indicator’s ability to hold or regain bullish grounds during normal market retracement after the initial move from the bottom.
5. Major initial sell signals occur when a negative divergence forms from bullish territory (above zero) creating a top formation that might take many weeks and months, which followed by a decline into bearish territory (below zero). A confirmed sell will occur with the indicator’s inability to recover bullish grounds again when the market turn back up (sometimes even to new highs).
7. The slope of the summation curve is determined by the difference between the actual reading and the zero line as I explained above. So, an "extreme bullish reading" will cause the SI to rise sharply, and vice versa which can results in a lot of whipsaws. It’s better to use an MA crosses over. This is often less timely, but it filters out a significant number of false signals. A suggested time frame for this is either 35-day simple MA, or my favorite the 21-day EMA (plotted on the chart above) and even there, you will find few number of whipsaw signals, indicating that this approach is a mechanism to reduce but not to eliminate whipsaws. This indicator renders a bullish signal when it crosses above a 21-period moving average and a bearish signal when it crosses beneath it. The best bearish “signals” occur if the cross occurs under market overbought conditions and vice versa.
As of today and from the chart above we can see that:
1. SI gave a long-term "bullish call" see above #4 and chart.2. SI is rising indicating that money is going into the market.
3. SI is above +1000 indicating a long term bullish status.
4. SI had no significant divergence from the NYSE Composite.
5. SI 21-day EMA is above the SI rendering a bullish signal.
Until next article and as always, I wish you a profitable trading and a wealthy life.
Please rate this article at the top of the page. Thanks!
GoodVibe
Mr. Lucky
Footnotes:
*Many smart people say they won’t bet against the SI long-term signals. I don’t know about that! I never put my faith or trade based on any one indicator. Long or short-term signal by any indicator do fail. Indicators should never be considered right or wrong. They need to be analyzed in context with proper interpretation. Regardless of the indicator, you must use several correct periods to establish context. Whenever possible, you should not make generalizations about the current behavior of market indicators without first observing their behavior over an extended period of time and in a wide range of market conditions. For example, a sharp rise by the SI will signal that some up cycle is underway. So the absolute direction you can forecast from an indicator like the SI directly depends on the cycle that you study and the direction of the broader trend.
**More about calculation - Reference 1.2.3
Please read more from here in the footnotes. Also check the original work of the SI inventors Sherman and Marian McClellan in their book "Patterns for Profit" found here.
The Ratio Adjusted version adds a step to the calculation process, dividing the A-D difference by Advances plus Declines, and then multiplying the result by 1000 to get it back into the realm of real numbers. In effect, we are mathematically pretending that there are always exactly 1000 stocks trading. As such, it is better for multi-year comparisons.
There are two methods for calculating the Summation Index. The first method (the one originally used by the McClellans) simply maintains a running total of the values of the McClellan Oscillator. The second method uses the following formula:
Summation Index
=
1000 + (10%Trend - 5%Trend) - [(10 x 10%Trend) + (20 x 5%Trend)]
Where:
5%Trend = 39-day EMA of (Advancers-Decliners)
10%Trend = 19-day EMA of (Advancers-Decliners)*McClellan Summation Index (New Method):
Mathematician James Miekka developed the new formula for calculating the daily SI that prevents drift and forces it to maintain a consistent relationship with the Zero Line. Rather than adding the current MO value to the prior day's SI (the traditional method, which causes the undesired drift), the Miekka formula derives the Summation value directly from the daily 5% and 10% index readings. This not only stabilizes the SI, it also allows us to calculate the SI for any day without knowing what the prior day's reading was. Also important, the Miekka method insures that independent calculations will always be within a few points of one another -- differences are often caused by rounding and variances in advance-decline data.
The formula is:
Summation Index = 1000 - (9 * 10% Index) + (19 * 5% Index)
The McClellans have determined that the +1000 level is the neutral value for the Summation Index, which is the reason for the "1000" in the formula.2 ***According to the McClellans, the beginning of a new bull market is signaled if the NYSE-based SI first moves below the -1200 levels and then quickly rises +2500 points from its prior low. In the traditional SI, the McClellans addition, relatively sharp movements, greater than 3600 points from overbought to oversold extremes, indicate the beginning of a major move.
****Overbought and oversold readings may vary among indices and historical precedent. Always gather as many indicators to support your analysis without disregarding others that don’t.
****On May 2009, SI crossed over +1000 and barely touched above +1200 in what so called "overbought condition". Looking back to 1928 to see what happens after SI crosses above 1200, out of all the instances when the SI was above 1200 only two lead to any declines of substance during a bear market.
For Readings above 1200, from 27 separate times the SI went below zero and above 1200, you find only two times that there were anything over 10% declines and they were in 1940 & 1941. A decline in 1940 started one month after the reading and lasted 6 months and was a decline in the 16%-17% range while in 1941 it was coincident with the top and lasted 7 months and was around 28%. That will lead us to believe (if history to repeat itself), any decline that materializes from a trading top has little risk of turning into anything more than a normal retracement. Ref.
Same happened in June-July 2009 when SI pulled back to +400 from +1200 and the market retraced from 956 to 869 to launch a bullish offensive that took S&P back to 956, crossed the S&P 1000 mark, and took the SI to +1393 higher than the previous 1200 levels.
NYSE McClellan Oscillator (MO)
In the previous article we discussed Advances & Declines, as well as the A/D line and A/D Ratio indicators that are derived from them. Today, we look at another breadth-based indicator - the NYSE McClellan Oscillator ($NYMO). It is derived from the same daily Net Advances (advances minus declines) on the NYSE. It was named after Sherman and Marion McClellan who invented it in the 1960's.
The McClellan Oscillator (MO) is a short to intermediate-term momentum breadth indicator, which simply means it is designed to determine the strength of a market trend. It is based on the concept that a strong up-trending or down-trending market is characterized by a large number of stocks advancing or declining moderately in a collective manner, rather than a small number of stocks making large gains or losses. It is based on the movements of an Exchange (New York Stock Exchange is the most followed) not on any one particular stock. It is calculated daily and attempts to anticipate positive and negative changes in the A/D statistics for market timing purposes.
19EMA and 39EMA of daily Advance-Decline Issues - Enlarge
In order to better identify the trend that is taking place in the daily breadth, we smooth the A/D data by using special type of calculation known as an exponential moving average (EMA). It works by weighting the most recent data more heavily, and older data progressively less. The amount of weight given to the more recent data is known as the smoothing constant. The numerical difference between the 19-day exponential moving average (EMA) of Net Advances less the 39-day EMA of Net Advances is basically the value of the McClellan Oscillator (MO).*
The NYSE Daily McClellan Oscillator (MO) - Enlarge
As a difference of two moving averages, this indicator oscillates above/below the zero line. When the 19-day EMA (shorter moving average) moves above the 39-day EMA (longer moving average), the oscillator crosses above its zero line signaling short term breadth momentum is strengthening and turning the corner. It signals that advances are gaining the upper hand. Conversely, when the 19-day EMA declines below the 39-day EMA, the Oscillator crosses below its zero line. It signals that declining issues are dominant and short term breadth momentum is weakening.
Are you lost? Don’t! It’s very easy. If I understood how to use the MO, trust me, anyone can. Let’s take it bit by bit.
First, what is an oscillator?An oscillator is an indicator that fluctuates above and below a centerline or between set levels as its value changes over time. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period. More!
Second, what is exponential moving average EMA?It’s a data series that is simply formed by computing the average (mean) price of a security over a specified number of periods usually using the closing price. For example: a 5-day simple moving average (SMA) is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10 + 9 + 11 + 15 + 15 = 60 / 5 = 12
The calculation is repeated for each new daily price on the chart. The averages are then joined to form a smooth curving line that we call the moving average line, which makes spotting trends far easier than the raw data. Continuing the example above, if the next sixth day closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day SMA then would be 13 instead of 12. In order to reduce the lag in SMA, technicians apply more weight to recent prices relative to older prices according to a calculated formula producing what is known as the exponential moving averages EMA. More!
Now, you know what an oscillator is and what is an EMA. Good start, don’t you think? For the calculation, you don't need to worry! It is automatically performed for you and presented as a chart that anyone can understand and use. You will not need to calculate anything and no math is required.
Back to the MO!
Now we got the calculation** behind us, all we have to do on our part is to know the symbol $NYMO to enter it in the chart's symbol box to get the plotted chart of this oscillator for any time-frame available we desire (see chart above). Make sure to choose the “Area” type instead of Candlesticks. See the previous two links for more details.
What are the benefits of the McClellan Oscillator?As general guidelines (not hard rules guaranteed to result in profitable trading every time), the MO can offer us many types of structures for interpretation such as:
1. When the Oscillator is positive, it generally portrays money coming into the market; conversely, when it is negative, it reflects money leaving the market.
2. Moves below zero Line, render a Short-term SELL Signal while a Short-term BUY Signal results when it moves above its zero (flat) line.
3. A thrust above +50 is viewed as bullish for the stock market, while a thrust below -50 is viewed as bearish.
4. The MO fluctuates between an oversold territory (-100 and below) and overbought territory (+100 and above). When the Oscillator reaches these extreme readings, it can reflect an overbought or oversold condition.***
5. The oscillator leads the index; so if it fails to confirm a new index high or low, the index may be forming a top or bottom. We can look for positive or negative divergences in the Oscillator. A series of rising troughs would denote strength, while a series of declining peaks weakness. Divergence provides a warning but should be combined with other signals and indicators to provide better entry or exit points.
Usually when the index is rallying but more issues are declining than advancing, it signals that the rally is narrow to small number of stocks that are making large gains while much of the market isn't participating, which characterizes a weakening bull market. Although the perception that the overall market is healthy based on prices, in reality it isn't based on breadth and participation. Conversely, when a bear market is still declining, but a smaller number of stocks are declining, an end to the bear market may be near.
Even though this breadth indicator is not perfect, its level can help determine overall market direction and underlying strength but its greater value lies in its longer-range version known as the McClellan Summation Index (SI), which I'll discuss in my next article.
To sum it up:According to the MO, to give a strong buy signal, the Oscillator must cross first over zero. Then it must thrust (but not necessarily stays) over +50 to confirm the initial buy signal that we got when we crossed above zero.
For the strong sell signal, it’s the opposite. Let me give you an example from the chart above. The Oscillator thrust under zero on Jan. 12, 2009 giving the first sell signal but stayed above –50 until Feb. 13 (near a market top) where it thrust under –50 to the bearish zone confirming the sell signal. It was not able to come back above zero until March 11 and above +50 on March 13, 2009 to the confirmation bullish zone giving a strong buy signal.
Notice: Like MACD and other momentum oscillators, the McClellan Oscillators provide earlier signals. While earlier signals are desirable, they are also more prone to whipsaw (being wrong). I usually smooth the data by using 5 DMA to avoid sharp gyrations and one-day events but I don’t completely discredit a one time thrust under –50 or over +50 (see chart - dotted black line).
As of today and from the chart above we can see that:
While the NYSE AD Line is advancing steadily and making new highs, the MO is not. The NYSE AD Line moved straight up in July and then zigzagged higher in August. As the AD Line zigzagged, the McClellan Oscillator moved lower, crossed into negative territory, and even plunged below -50 which is considered short term bearish signal for the market. It reflects a more divided market. We have yet to see enough selling pressure to affirm medium-term bearish. If we crossed back above zero, chances will improve the bullish continuation of the rally but if we failed to cross over +50, chances more selling will continue before finding a bottom.
Click here for chart update as of Sep. 9, 2009.
Until next article and as always I wish you as much as you wish for yourselves and even more.
Please rate this article at the top of the page. Thanks!
GoodVibe
Mr. Lucky
Critique - Through a multi-part series about the MO, Michael Stokes believes that despite the fact that the MO is based on advancing and declining issues (rather than price like most indicators), the end result is more or less the same. Click here for great read.
Footnotes:
More about calculation - Reference 1.2.3
*When calculating the MO, the ratio-adjusted index is often used for easier comparisons over long periods of time. The basic input for the ratio-adjusted version is no longer the daily advances minus declines.
Rather, you
1. Subtract declines from advances to get net advances.
2. Divide the result by the total of advances plus declines.
3. Calculate fast EMA1 (19 day) of what you receive from #2
4. Calculate slow EMA2 (39 day) of what you receive from #2
5. #3 result subtract from #4 result
6. Multiply #5 result by 1000 (for whole numbers instead of decimals).
McClellan Oscillator
=
{EMA1 of [(Advancing Issues - Declining Issues)/total Issues]
-
EMA2 of [(Advancing Issues - Declining Issues)/total issues]}
* 1000
(Note: The first time you begin to calculate an exponential average, you must calculate a simple moving average.)
**The McClellan Oscillator daily value is calculated by getting a 39-day exponential moving average EMA (0.05 exponent) average and a 19-day exponential moving average (0.1 exponent) average. After calculating the two averages each day, we subtract the 39-day EMA of advances minus declines (5% Index) from the 19-day EMA of advances minus declines (10% Index).
Today's 10% Index - Today's 5% Index
=
Today's McClellan Oscillator
The following are the exact formulas (the "*" is the spreadsheet version of a multiplication sign):
5% Index: [(Today's Adv. - Decl. - Prior Day's 5% Index) * 0.05] + Prior Day's 5% Index = Today's 5% Index
10% Index: [(Today's Adv. - Decl. - Prior Day's 10% Index) * 0.10] + Prior Day's 10% Index = Today's 10% Index
One more change that applies to the Summation Index found here is that zero (0) is now considered neutral for the Summation Index, so you no longer begin with 1000 in your Summation Index calculation.
***A "typical" MO pattern series consists of consecutive formation of a Complex Bottom, a Middle Spike, and a Buy Spike. Dropping below the zero line normally signals the beginning of a Complex Bottom formation, an extended period of oscillation below the zero line, which is the result of the negative breadth associated with corrections or consolidations. The typical Complex Bottom is a bowl-shaped series of oscillations below the Zero Line while the market is declining.
This is followed by a move well above zero, which begins the formation of the Middle Spike -- a stalactite between the move above zero and the move back below zero. The Middle Spike signals the beginning of an intermediate-term up move, but it is usually followed by another down move, possibly to lower lows. After the down leg of the Middle Spike has concluded, we can expect a Buy Spike, which as the name implies signals a new up trend in the market.
Buy Spikes are normally formed in oversold territory (-80 and below), but rising series of Buy Spikes is also a possibility. While this is a typical series of chart formations that will help us identify changes in market direction and determine current market status, unfortunately, they may not appear in the specified order . . . or at all. - Reference.
NYSE Advance Decline (A/D) Line
Chances are great that you opened a financial publication like The Wall Street Journal or visited a website like Yahoo! Finance to read some market internals and stats.
One of these stats is called Advances & Declines.The term “advances” refers to a running cumulative (collective) total of the number of stocks (issues) that have risen in price compared to their close on the previous trading day. So any stock that is currently trades above its closing price from the previous trading day is considered part of the day’s “advances” group.
Conversely, the term “declines” represents a running cumulative (collective) total of the number of stocks that have fallen in price compared to their close on the previous trading day. So any stock that is currently trading below its closing price from the previous trading day is considered part of the day’s “declines” group.
There’s also another part of this stats called “unchanged”, which refers to the number of stocks that trade at exact closing price from the previous day. (Live Chart)
“Advances” and “declines” are also called “advancing issues” and “declining issues”, respectively. In general, but with respect to volume,* the more stocks that are up (advancing) than down (declining), the more bullish the market for that day. Thus, in a rising market, more advances will be recorded, whereas in a falling market, you will usually find more declining issues.
Advancing and declining issues are used as a measure (indicator) of market strength or weakness that we call “market breadth”. It is based on the concept that a strong up-trending or down-trending market is characterized by a large number of stocks advancing or declining moderately in a collective manner, rather than a small number of stocks making large gains or losses.
On days when the advancers roughly equal the decliners it "offsets" any movement in the indexes. Days where the A/D ratio is about 1 to 1 are neutral days regardless of the movement in the indexes. On days when the ratio is 2 to 1, with either decliners or advancers ahead, the A/D numbers are more significant for judging market movements.
When decliners trail advancers, let’s say by a ratio of 2 to 1, we can say that market breadth that day was two-to-one positive and the overall tone of the market is viewed as bullish even if the indexes show little movement. Conversely, when the closing decliners outnumber advancers 2 to 1 or higher, it's often viewed as a bearish indication for the overall market and in the absence of other factors, a strong tone generally will continue.
Based on these daily (and intraday) numbers, an important indicator that we can plot on a chart was developed called the “Advance Decline (A/D) Line.”
How the index is calculated?
Computing the A/D line is straightforward and simple. Each day, we take the number of stocks advancing (increasing) in price on the New York Stock Exchange and subtract the number of stocks that are declining (decreasing) in price. We call the result "net advances" even if it is negative.
NYSE Advancing Issues - NYSE Declining Issues
=
Positive or negative number
=
Positive or negative number
The calculated number is then added to the previous day's A/D Line.
Let me give you an example, on Friday Sep. 4th, 2009 advancing issues ($NYADV – Click for live chart) were 2,444 stocks that closed the day with an increase in their share price. The declining issues ($NYDEC – Click for live chart) were 576 stocks that closed the day with a decrease in their share price.
2444 - 576 = +1868
That means decliners trailed advancers by a ratio of 4.24 to 1 positive and the overall tone of the market should be viewed as bullish especially that the NYSE Composite closed higher that day.
NYSE Net advances (Advance-Decline) Issues - Enlarge
Note: Chart is a capture for Sep. 10 to illustrate the data. Numbers above are for Sep. 4th
For the day, 1868 more stocks closed the day higher than closed the day lower. On the day before, Thursday’s cumulative A/D Line totaled 62444. Today's reading of +1868 would be added to yesterday's total. This would result in an updated total of 64312 to contribute another value to the cumulative A/D line in the chart below, which we will study today.
NYSE Daily Advance Decline (A/D) line "Cumulative"- Enlarge
Note: Changing the above time frame will change the value mentioned above.
Why it’s important?
Many market participants believe the NYSE A/D line is more revealing than popular indexes such as the Dow Jones, S&P 500, or the NASDAQ Composite. This is because the A/D line is usually calculated on the NYSE, which represents the largest equities marketplace in the world. Historically, not only the AD Line peaks out or bottom well ahead of these more widely followed market indexes and averages but also it turns down or up before its own market index turn down or up.
In general A/D line can be used to gauge:
1. Overall market strength.
2. Rising or falling trends.
3. The length and ability of the trend to continue, and
4. The risk of trend change
When thinking about the “AD line” I want you to think of it as a confirmation tool and divergence-warning tool. It is an important indicator to confirm the price of market movements as a whole and detect divergences. Notice that total daily difference between advancers and decliners as well as the value of the A/D line can be positive or negative, which is irrelevant. What is relevant is the direction or the trend of the AD Line and/or any divergence between prices and the AD line.
The A/D line looks at the ratio of advancers and decliners over time. We use it as a measure of breadth of the market in order to determine the strength of market movements to tell us whether bullish or bearish momentum is pushing the stock market.
On days when more stocks advance than decline, the A/D line will move higher signaling that a bullish momentum in the market is increasing. An increasing A/D Line is bullish because more stocks at the NYSE are closing the day with gains. Rising values of the A/D line can be used to confirm the likelihood of the upward trend continuing.
When the A/D line falls, more stocks fell than move higher. A declining A/D line is a sign of internal market weakness, signaling a bearish momentum in the market is strengthening. A decreasing A/D Line is bearish because more stocks are closing the day with losses. Falling values of the A/D line can be used to confirm the likelihood of the downward trend continuing.
2. Divergence-warning toolBecause the A/D Line reflects the action of the general market, technicians watch any divergences closely. Comparing the behavior of the A/D line to market will portray a much weaker or stronger market than can be gleaned by just looking at the surface price action.
Whenever you spot a divergence between price and breadth, trust breadth especially when the divergence is bearish.
As I said, A/D line movement in the same direction as the market confirms the market movement and indicates the movement will continue. As long as the NYSE Index and its A/D Line are moving in the same direction the trend will continue but if the NYSE Index makes a new high, which is not confirmed with a new high of the A/D Line as well, you should be cautious with your bullish views. This negative divergence is sign that the new high was driven by smaller number of stocks than before. It usually tell us that the markets are losing their breadth signaling potential reversals, weak price moves, or may be getting ready to change direction. Conversely, if the NYSE Index makes a new low and the A/D Line doesn't, then caution is warranted with your bearish views.
Remember that divergence can and usually last for more than a day or a week. It can last for very long periods of time. A/D line divergence is not a timing tool but it often indicates that the market's direction is "suspect" and that the current primary market trend is losing steam to the upside or the downside.
Example:
A historical look at the NYSE A/D line tell us that since 2002, it has been powering higher rising always to new high. The rise reflected the stock market’s strong performance and the fact that many issues that trade on the NYSE have been moving higher rather than lower. There have been a few instances when market breadth was poor and the A/D line dropped. However, during the last bull market, those few instances proved to be short-lived. During June-July 2007 (well ahead of market top), something different happened. The AD line peaked and started falling since then.
Check out the chart above to see what happened during that period. You can see $NYA (NYSE Composite Index) made a higher high on both July and October 2007, an acknowledged bullish sign. However, the A/D Line didn’t confirm the index ascent by failing to make a newer high in both instances. That should warranted investors to the fact that the market as a whole was not behind the move higher and should be wary of the advance.
Since October 2007 the A/D Line confirmed the trend in price of the $NYA. The $NYA made lower highs and lower lows and likewise, the A/D line made lower highs and lower lows.
To give you an example of a bullish divergence, look at the recent move in July 2009. $NYA made a lower low, an acknowledged bearish sign. However, the A/D Line did not confirm the index descent by not making a newer low. That should send a signal that market breadth and strength is stronger than the prices would tell us. And always whenever you spot a divergence between price and breadth, trust breadth especially when the divergence is bearish.
Another important indicator that is derived from the A/D data is the Advance/Decline Issues Ratio: $ADRN
Daily Advance/Decline Issues Ratio - $NYADV:$NYDEC - Enlarge
This ratio is derived from dividing (not subtracting) the number of stocks that are currently trading higher (advancing) by the number of stocks that are presently trading lower (declining).
Together with the A/D line, the A/D ratio can be an added confirmation to your analysis to measure the true overall market strength. An increasing A/D ratio with a large positive value indicates a strong market momentum, while decreasing ratio represents a weak market momentum.
Unlike the AD line; the AD ratio can’t be negative. The AD issues ratio is applied as follows:
- Values higher than 1 show that more issues are presently advancing than declining;
- Values between 0 and 1 indicate that more issues are currently declining in price.
The advantage of using A/D Ratio:
1. It remains constant. It has an absolute value that does not vary in function of the number of components being traded on the NYSE.
2. It allows comparisons among different indexes or stock exchanges. For example, comparing the AD ratios of the DJIA and the NYSE is much easier than evaluating the AD lines for the NYSE and the DJIA.
3. It can be used as an Overbought/Oversold Indicator:
The (OB/OS) Indicator is simply a smoothed AD ratio. Smoothing the ratio with a moving average can eliminate daily fluctuations of the A/D Ratio so it can be used as an overbought/oversold indicator. The smoothing is done by taking the 10 or 15-day exponential moving average EMA of the A/D ratio, which makes it fluctuate within a narrower range with heavier weighting given to recent data.
Historically, an extreme average ratio can signal the incoming of a market turn. The higher the value, the more “overbought” the market and the more likely a correction will occur. Likewise, low readings mean an “oversold” market and suggest a technical rally within reach.
Markets, however that appear to be extremely overbought or oversold may stay that way for more than anyone can expect. It is prudent to collect data from number of indicators and wait for the prices to confirm your analysis that a change is due.
4. Like the A/D line divergence principle outlined above, same can be applied to the A/D Ratio as well. For example, higher prices achieved with lower AD ratio means fewer stocks are participating in the new move than the previous one, which is a sign of weakness.
What else to watch?
1. Examining peak and trough A/D line trendline:
The most effective way to do this is to draw trendlines on both the underlying (NYSE) chart and the A/D line chart (green dotted line on the chart above). A break in the A/D line trendline will provide a confirmation of the message given off by the underlying price chart.
2. Violation of the moving averages lines:As you can see from the chart above, the 50 and 200 Daily moving averages are plotted over the AD line. First, the AD line dropped below the 200DMA in November 2007 for the first decisive break of the long-term bullish trendline since the start of 2003 bull market.
Second, The 50DMA crossed below the 200DMA (known as the death cross) during the same month for the first time as well affirming a bearish signal for the market. These were sufficient warnings that market breadth was starting to deteriorate in a serious way late 2007 before the serious damage in the major indexes became obvious.
3. The horsemen and the infantry:Another way to use the AD Line is to look for a divergence between the DJIA (or a similar index like S&P 100) and the NYSE A/D Line. Looking at this parameter allows us to reduce the impact of the large cap stocks, which influence market indexes the most, and instead examine price trends of a diverse range of stocks through a large market like the NYSE. It measures market sentiment and tell us the fraction of the overall market that is participating in the market's up or down move.
Often, an end to a bull market can be forecast when the A/D Line begins to roll over while the DJIA is still trying to make new highs. If history is an indicator, when a divergence develops between the DJIA and the A/D Line, the DJIA has corrected and gone the direction of the A/D Line. A military analogy is often used when discussing the relationship between the A/D Line and the DJIA. The analogy is that trouble looms when the horsemen lead (DJIA is making new highs) and the infantry refuse to follow (A/D Line fails to make new highs).
4. The weekly A/D line:Typically, daily AD Line is used to watch for short to intermediate trends. A weekly AD Line is considered more useful for trend comparisons that span several years. Now and then, check it as well.
As of today and from the chart above we can see that:
1. AD line long-term downturn trend (green line) reversed to the upside.
2. AD line is confirming the overall market strength and bullishness.
3. AD line trend is rising steadily with no bearish divergence.
4. AD line made a golden cross (50 over 200DMA), a bullish indicator.
5. AD line still holding 20DMA, short term bullish indicator.
6. The horsemen as well as the infantry are advancing together.
As a sign of concern:
1. The A/D ratio is declining as you can see from the daily A/D ratio chart above. It's a sign of waning strength and should not be overlooked. Though the weekly A/D ratio is still in uptrend and holding support.
2. While the A/D line overcame its downtrend and flipped it to the upside, the price in the Composite yet to follow. It's not a bearish sign because it takes time for the underlying index to follow the lead of the AD line. That said, it will be a strong bullish sign for the index to follow the A/D line sooner than later.
Until next article and as usual, I wish you as much as you wish for yourselves and even more.
Please rate this article at the top of the page. Thanks!
GoodVibe
MR. Lucky
Footnotes:
*The A/D volume line: I will touch on that in a separate article but for now know that the principles discussed above can be applied not only to the actual number of advancing and declining issues, but also to their respective volume (“advancing volume” and “declining volume”). By applying the above indicators to volume data, as opposed to simply to the number of stocks moving up or down, we can get a better feel for the TRUE prevailing market sentiment and we can uncover those areas where the biggest trading activity is taking place and truly on which side. Stay tuned!
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