Indicators
BREADTH INDICATORS
Index Breadth
These indicators measure the breadth of trends within a particular index and are best known for their use as "contrary indicators" and valuable tools for market timing. They work on the principle that once virtually all members of a particular stock index are participating in the same market movement then there is a strong probability that this market movement will come to an end in the near future. This phenomenon of over-extended trend conditions is classified as being "overbought" or "oversold." It is a good sign when both the stock market averages and the breadth are moving up in conjunction. When the averages are moving higher, but the breadth is declining, it is said that the "generals" are advancing, but the "soldiers" are retreating. This is a negative situation most of the time. It is a negative sign when both the market averages and breadth are moving down. In some markets, breadth is stronger than the averages. This means the average stock is doing better than the averages. This is a pretty good sign, but not as good as when both of them are doing well.
Industry Breadth
These indicators follow the same methodology to index breadth but measure the percentage of stocks within a particular sector or industry that hold bull trends. They are useful for identifying potential rotation between sectors i.e. reducing exposure to sectors where breadth is overbought and declining and increasing exposure to sectors where breadth is oversold and expanding.
The Industry Bullish % is the % of sub industries (190 or so on our system) with P&F buy signals. The charts for those sub-groups are updated at the end of each week, therefore the indicator is updated by Saturday each week.
Types of Breadth Indicator
The first breadth indicator, the NYSE Bullish %, was developed by Investors Intelligence in 1955, and measures the percentage of point & figure bull trends amongst NYSE constituents. Since then, we have developed indicators which measure bull trends or uptrends using different techniques. They are defined as follows: Bullish % or % Bull Trends - every point & figure stock chart has either a buy or a sell signal. This is a major advantage to technical analysis and is entirely mechanical.
The bullish % is the number of stocks on "buy" signals compared to the total for the groups. When most stocks are on sell signals, the bullish % is low. It is a positive sign when the bull % begins to improve. It is negative when the bull % turns down from highs. We also consider whether the P&F chart is in an up or down column. If the bullish % is on a P&F buy signal and in an up column, it is long term and short term bullish. If the P&F chart is on a buy signal and in a down column, it is long term bullish, but short term bearish. If the P&F chart is on a sell signal and in a down column, it is long and short term bearish. If the P&F chart is on a sell signal and in an up column, it is long term bearish, but short term bullish.
% 10 week moving averages - this indicator reflects the percentage of individual shares in a group above their own 10 week moving average. The fewer the number of component stocks per sector or market, the more volatile the indicator. It uses overbought (70% & higher) and oversold (30% & lower) as target levels for rallies and declines. Reversals from overbought or oversold that break those levels are strong calls for action, with a stronger indication if a p&f signal is shown.
% 30 week moving averages - this indicator calculates the percentage of stocks in a given area that are above their own 30 week moving average. This gives an indication of medium to longer term overbought (above 68%) or oversold (below 32%) conditions, and always trails the % 10-wk MA in movement. Like the 10-week, the best action is when the indicator moves up from below 30% as this is a longer term sign that the market is ready to begin a sustainable advance. Conversely, the market becomes bearish when it moves down below 70%, signalling that the market is ready for a significant down move.
% Relative Strength - this indicator measures the % of stocks with positive relative strength against the S&P500 index i.e. the number of shares that are in outperforming trends.
Breadth definitions
Bull Confirmed – chart is on a p&f buy signal and is rising (column of x’s); and/or is in a column of x’s above 68%. Bear Confirmed – chart is falling (column O’s) below 70% and has generated a p&f sell. Bull Correction – chart is on a p&f buy signal but is falling (column of O’s) without yet reaching 70%. Bear Correction – chart is on a p&f sell signal but is rising (column X’s) without having moved above 68%. Bull Alert – chart shows rising (X’s) moving up from below 30% but has not yet generated a p&f buy. Bear Alert – chart is falling from above 70% to below 70% without yet generating a p&f sell.
Bull Top - chart is falling (column of Os) but above 70%.
WEEKLY CLIMAXES
Buying Climaxes are generated when a stock makes a new 52 week high, but ends with a loss for the week. They are a sign of distribution and are often the first sign that a hot stock is running out of steam as investors take advantage of new highs to realize some gains. They therefore provide a useful warning signal for a coming change.Selling climaxes are generated when a stock makes a 52 week low, but ends with a gain for the week. They are a sign of accumulation and often represent the end of a bear phase for a stock. The weak stockholders are finally capitulating and throwing in the towel and ownership is said to pass from "weak hands" to "strong hands".
US MARKET RATIOS
Bond/Stock Ratio: Updated weekly from Barron’s 50 stock Average; the ratio of bond yields to stock yields.
CBO Put/Call Ratio: Updated daily; The 5-day moving average of total CBOE call volume to total put volume.
OEX Put/Call Ratio: Updated daily; 10-day moving average of total OEX call volume to total put volume
Price/Dividend Ratio: Updated weekly from Barron’s 50 stock Average, the price investors pay for $1 in dividends.
Valueline/S&P500: Updated weekly; the point difference between Value Line Composite and S&P500 and used to identify small stock or big-cap leadership.
Short Interest Ratio: Updated monthly; total short interest divided by average daily volume to indicate period to cover short positions
DJIA 1 Year %: Updated weekly; percentage difference between latest DJIA close and 1-year ago level.
US VOLUME INDICATORS
These indicators are constructed using the total number shares traded daily to compile a cumulative total that is plotted on a p&f chart. Each day’s direction (whether to add or subtract to that day’s volume) can be determined by any number of factors. We plot two charts each for the NYSE and NASDAQ. We plot one chart using the daily breath [up or down] as a determinate, and secondly we use the change in the DJIA and NASDAQ Composite (up or down at the close). The plotted OBV charts show p&f buy and sell signals and are used to confirm other indicators, adding weight when the signals match up.
NYSE OBV (by DJIA): Updated daily; cumulative total of NYSE volume using the DJIA Close (positive or negative) to determine whether to add or subtract that day’s volume.
NYSE OBV (by breadth): Updated daily; cumulative total of NYSE volume using the day’s breadth reading (positive or negative) to determine whether to add or subtract that day’s volume.
Nasdaq OBV (by breadth): Updated daily; cumulative total of NASDAQ volume using the day’s breadth reading (positive or negative) to determine whether to add or subtract that day’s volume.
Nasdaq OBV (by Composite): Updated daily; cumulative total of NASDAQ volume using the day’s NASDAQ Composite close (positive or negative) to determine whether to add or subtract that day’s volume.
NYSE 10 day Up/down Volume: Updated daily; a 10-day moving average of NYSE upside volume divided by the total upside and downside volume.
NYSE Moneyflow: Updated weekly; money moving into or out of stocks, based upon dollar value of shares traded on the upside and the downside, weighted to most recent action.
US HIGH/LOW INDICATORS
These ratios gives daily comparisons of upside breadth and volume, compared to total "up and down" of each. They are plotted on a 1-point p&f chart that allows for faster movement. They do NOT achieve traditional overbought or oversold levels, and we observe reversals from prior top and bottom levels. The reversals from extremes are NOT tradable by themselves, but provide early clues of potential reversals areas. When they are confirmed by the Short Term Composite, there should be a tradable reaction.
NYSE High Low: Updated daily; a ratio of the number of NYSE stocks showing new 52-week highs divided by the sum of the total new highs and new lows, smoothed using a 10-day moving average.
NYSE Weekly High Low: Updated weekly; a ratio of the number of NYSE stocks showing new 52-week highs in a Monday-Friday week, divided by the sum of the total new highs and new lows, smoothed using a 10-week moving average. Used for confirmation of the daily figure.
Nasdaq High Low: Updated daily; a ratio of the number of NASDAQ stocks showing new 52-week highs divided by the sum of the total new highs and new lows, smoothed using a 10-day moving average.
ASE High Low: Updated daily; a ratio of the number of ASE stocks showing new 52-week highs divided by the sum of the total new highs and new lows, smoothed using a 10-day moving average.
US ADVANCE/DECLINE INDICATORS
Each day, the number of declining stocks is subtracted from the number of advancing stocks for each exchange, with the result is added to the prior day’s total. This yields a running, cumulative total that we plot on p&f charts. A short term momentum signal is also derived by comparing the current figure with that shown 10 sessions ago. Positive momentum is shown if it is above, negative momentum if it is below, BUT at least two consecutive sessions are needed in the opposite direction to indicate a shift.
NYSE 10 Day Adv/Dec: Updated daily; a ratio of the number of NYSE advancing stocks divided by the total advancing and declining, smoothed using a 10-day moving average.
NYSE Cum Adv/Dec: Updated daily; the cumulative total of the number of advancing stocks less the number of declining NYSE stocks. A short term momentum signal is derived by comparing the current figure with that shown 10 sessions ago.
Nasdaq Cum Adv/Dec: Updated daily; Updated daily; the cumulative total of the number of advancing stocks less the number of declining Nasdaq stocks. A short term momentum signal is derived by comparing the current figure with that shown 10 sessions ago.
II PROPRIETARY COMPOSITE INDICATORS
II Short Term Composite Indicator: A proprietary indicator generated from scores awarded to 29 market indicators (unweighted) and is only concerned with the most recent action. The Indicator oscillates between values of 0 and 100 and provides the first indication of short term moves. Typically, it detects potential up moves from oversold readings and down moves from overbought readings. Confirmation from the NYSE % 10-wk indicates a broadly tradable move, otherwise it is for the very short term.
II Sector Sum Indicator: A proprietary indicator that scores the daily status of 45 Broad Industry Bullish % charts, each designated a possible value of -1 to +1. The ranking depends on chart status (+1 bull confirm or correction; +0.5 bull alert; 0 bull top; -0.5 bear alert; -1 bear confirm or correction). The sum is plotted on a 1 pt/box p&f chart. It generates early warnings of trend change from extreme readings. While on a buy or sell from extremes, reversals up or down will confirm short term potential moves in the opposite direction, already signalled by the short term composite.
II Long Term Composite Indicator: A proprietary indicator generated from the scores awarded to over forty indicators. These indicators have been selected across a wide range of disciplines covering index trends, breadth, sentiment, moneyflow and financial/economic factors. The scores awarded to each indicator are weighted to create an indicator that generates signals at market extremes i.e. buy signals at market bottoms and sell signals at market tops. It became apparent to us that we needed to apply more emphasis on leading indicators and therefore weightings are dependent on each indicator’s predictive value rather than its trend following capability.
OBV (On Balance Volume): A popular indicator measuring positive and negative volume flow. OBV is calculated by adding a stock's volume when the close is up and subtracting it when the close is down. The cumulative total of the volume additions and subtractions forms the OBV line. To use, compare with the price chart of the security to look for divergences or confirmation.
Volume Accumulation Distribution (VAD): Indicator weights the volume according to the price move. The price move is more significant if the day’s close is nearer to the top of the range on an up day or nearer to the bottom of the range on a down day. One can imagine "buying pressure" pushing the price up its daily range and "selling pressure" moving it downwards within the day’s range. VAD Signals - VAD can give an early sign that a price trend reversal is about to take place, often before this is even apparent from the stock price itself. The indicator is interpreted by analysing "divergence" signals. In a case of bullish divergence, the VAD indicator will first fall more slowly than the price and, as the inflection point is reached, rally more quickly than the price (The opposite is true for bearish divergence.)