TheCompleteGuidetoMarketBreadthIndicators

byGregoryL.Morris

©2015GregoryL.Morris

DedicatedtoLaura

ListofCharts,Tables,FiguresChart1-1-Advances,Declines,andUnchanged,allasapercentageoftotalissuesChart1-2NewHighsandNewLowsasapercentageoftotalissuesChart1-3UpVolumeandDownVolumeasapercentageoftotalissuesChart3-1-AdvancesandDeclinesChart3-2AdvancesandDeclinesadjustedforTotalIssuesChart3-3NewHighsandNewLowsChart3-4NewHighsandNewLowsadjustedforTotalIssuesChart3-5UpVolumeandDownVolumeChart3-5bUpVolumeandDownVolumeplottedusingsemi-logscalingChart3-6UpVolumeandDownVolumeadjustedforTotalVolumeChart4-1-AdvancesminusDeclinessmoothedby21-daysChart4-2AdvancesminusDeclinesexponentiallysmoothedby3daysChart4-2bAdvancesminusDeclinesexponentiallysmoothedby3dayswith+1000-and-1000-zonesChart4-3AdvanceDecline10-and30-smootheddifference-MamisChart4-4AdvanceDeclineOverboughtOversoldChart4-5AdvanceDeclineOverboughtOversoldwithlevelsat+400,+150,-150,and-400Chart4-6AdvanceDeclinetechnique-LindsayChart4-7AdvanceDecline-KinsmanChart4-8PluralityIndexChart4-9PluralityIndexwithnewzonesChart4-10-Fugler3-dayAdvanceDeclinetechniqueChart4-11-AdvanceDeclineLineChart4-12AdvanceDeclineLinenonconfirmation-1987Chart4-13AdvanceDeclineLinenonconfirmation-1998Chart4-14AdvanceDeclineLinedivergencesChart4-15AdvanceDeclineLine-weeklyChart4-16MomentumIndex-WeinsteinChart4-171%AdvanceDecline-SwenlinChart4-18EakleAdvanceDeclineIndexChart4-19EakleAdvanceDeclineIndex-weeklyChart4-20-AdvanceDeclineLineNormalized–5daysChart4-21-AdvanceDeclineLineNormalized-21-daysChart4-22BoltonAdvanceDeclineLineChart4-23BoltonAdvanceDeclineratio-21-daysmoothChart4-24AdvanceDeclineLineadjustedfortotalissuesChart4-25BigMoversOnly-35%Chart4-26BigMoversOnly-50%

Chart4-27AdvanceDeclineLineOscillatorChart4-28AdvanceDeclineLineOscillator-AppelChart4-29AbsoluteBreadthIndex-50-daysmoothChart4-30-AbsoluteBreadthIndex-21-daysmoothwith300-and1100-levelsChart4-31-AbsoluteBreadthIndex-21-daywith250-and600-levelsChart4-32AbsoluteBreadthIndexAdjustedbyTotalIssues-21-daysmoothwith10-and30-levelsChart4-33McGinleyAdvanceDecline(AD)PowerChart4-33bWeeklyMcGinleyADPowerChart4-34CoppockBreadthIndicatorChart4-35HaurlanIndex–Short-termChart4-36HaurlanIndex–Intermediate-termChart4-37HaurlanIndex–Long-termChart4-38McClellanOscillatorChart4-39McClellanSummationIndex-TraditionalChart4-40-McClellanSummationIndex-MiekkaChart4-41-McClellanSummationIndex-SwenlinChart4-42McClellanSummationIndex-PringChart4-43MerrimanNYSEBreadthModelChart4-44SwenlinITBreadthMomentumOscillatorChart4-45SwenlinTradingOscillator–BreadthChart4-46ZahorchakMethod-dailyChart4-47ZahorchakMethod–weeklyChart4-48ZahorchakAlternate–dailyChart4-49ZahorchakAlternate–weeklyChart4-50-ZahorchakAlternatespecial-weeklyChart5-1-AdvanceDeclineRatio–1965-2004Chart5-2AdvanceDeclineRatio–1996-2004Chart5-3BreadthThrustChart5-4BreadthThrustwithsimple10-daysmoothChart5-5BreadthThrustwithexponential8-daysmoothChart5-6BreadthThrustContinuationChart5-7DuarteMarketThrust-weeklyChart5-8EliadesSignoftheBearChart5-9HughesBreadthMomentumOscillatorChart5-10-HughesBreadthMomentum%OscillatorChart5-11-PanicThrustChart5-12STIX–Short-TermTradingIndexChart5-13STIX–with10-daysmoothChart6-1-SchultzAdvances/IssuesTradedRatioChart6-2SchultzAdvance/TotalIssues-smoothedChart6-3AdvanceDeclineDivergenceOscillatorChart6-4AdvanceDeclineDiffusionIndexChart6-5BreadthClimaxChart6-6DecliningIssuesTRIXChart6-7AdvancingIssuesTRIX

Chart6-8DisparitybetweenNYSEIndexandAdvanceDeclineLineChart6-9DisparityIndexChart6-10-WalterHeibyDynamicSynthesisChart6-11-WalterHeibyDynamicSynthesisasapercentageofTotalIssuesChart6-12WalterHeibyDynamicSynthesisIndicatorChart6-13UnchangedIssuesChart6-14UnchangedIssues–21-daysmoothChart6-15UnchangedIssuesasapercentageofTotalIssuesChart6-15bUnchangedIssues/TotalIssues-1987Chart6-16VelocityIndexChart7-1-NewHighs–NewLows–21-daysmoothChart7-2NewHighsNewLows%TotalIssues-HayesChart7-3NewHighsNewLowsLineChart7-4NewHighsNewLowsLine–21daysmoothChart7-5NewHighs&NewLowsOscillatorChart7-6NewHighs&NewLowsOscillator-AppelChart7-7NewHighsNewLows-MorrisChart7-8HighLowRSIChart7-9HighLowStochasticChart7-10-NewHighsNewLowsRatio–21-daysmoothChart7-11-NewHighsNewLowsRatio–10-daysmoothChart7-12NewHighNewLow-CohenChart7-13NewHighsNewLowsRatio-MerrillChart7-14WeeklyNewHighs-HayesChart7-15NewHighs-HayesChart7-16NewHighs&NewLowsCrossChart7-17NewHighNewLowCross–10-daysmoothChart7-18NewHighsNewLows-BurkChart7-19NewHighs%TotalIssuesChart7-20-NewHighs%TotalIssuesRateofChangeChart7-21-WeeklyNewHighsNewLows-HayesChart7-22NewLows%TotalIssuesChart7-23NewLows%TotalIssuesRateofChangeChart7-24HighLowLogicIndexChart7-25HighLowLogicIndex-weeklyChart7-26HighLowLogic-AppelChart7-27LowHighLogicIndexChart7-28HighLowValidationIndexChart8-1-UpVolume–21-daysmoothChart8-2UpVolume–10-daysmoothChart8-3UpVolume–21-dayDetrended

Chart8-4DownVolume–21-daysmoothChart8-5DownVolume–21-dayDetrendedChart8-6ChangedVolume-21-daysmoothChart8-7UpVolumeandDownVolumeChart8-8McClellanOscillator-VolumeChart8-9McClellanSummation-VolumeChart8-10-MerrimanNYSEVolumeChart8-11-SwenlinITVolumeMomentumOscillatorChart8-12SwenlinTradingOscillator–VolumeChart8-13UpVolumeDownVolumeLineChart8-14CumulativeVolumeRatioChart8-15CumulativeVolumeRatio–10-daysmoothChart8-16ADOBVwithOBVsimilarityChart8-17ADOBVwithtrendlinedivergenceChart8-18ADOBVOscillatorChart8-19Volume%RatioChart8-20-UpVolume–DownVolumeChart8-21-UpsideDownsideVolumeRatioChart8-22UpsideDownsideVolume-McMillanChart8-23PetersonUpDownChart8-24ZweigupvolumeChart8-25ZweigDouble9UpVolumeChart8-26ZweigDouble9DownVolumeChart9-1-ArmsIndexChart9-2ArmsIndexOscillator21-55Chart9-3ArmsIndex-4daywithbandsChart9-4ArmsIndex-21-daysmoothwithdivergenceChart9-5ArmsIndex-10-daysmoothinvertedChart9-6ArmsIndex-2.65daysshownChart9-7ArmsIndex-40-averageChart9-8ArmsOpenIndex–10-daysmoothChart9-9ArmsOpenandwithBollingerBandsChart9-10-WTRIN10Chart9-11-BretzTRIN-5Chart9-12BretzTRIN-5InvertedChart9-13CashFlowIndexChart9-14CompositeTapeIndex-mediumChart9-15CompositeTapeIndex-shortChart9-16CompositeTapeIndex-longChart9-17DysartpositiveandnegativeChart9-18EliadesNewTRIN

Chart9-19HallerTheoryChart9-20-HindenburgOmenChart9-21-MarketThrustChart9-22MarketThrustOscillatorChart9-23MarketThrustSummationChart9-24MarketThrustOscillator21-&55Chart9-25McClellanOscillator-MorrisChart9-26McClellanOscillator-MorriswithsmoothingChart9-27McClellanSummation-MorrisChart9-28MovingBalanceIndicatorusingLloydsignalsChart9-29MovingBalanceIndicatorwithStewartsmoothingChart9-30-MovingBalanceIndicatorbuyat40Chart9-31-TechnicalIndexChart9-32TechnicalIndexRateofChangeChart9-33TitanicSyndrome-1988Chart9-34TrendExhaustionIndexChart9-35TrendExplosionIndexChart10-1-McClellanNYSERatioAdjustedVolumeminusRatioAdjustedAdvanceDeclineSummationIndexChart10-2Ratio-AdjustedSummationIndex(RASI)Chart10-3Ratio-AdjustedVolumeSummationIndexChart10-4NasdaqDailyA-DLineChart10-5Nasdaq100A-DLineChart10-6Nasdaq100DailyUp-DownVolumeLineChart10-7Up-DownVolumeLineChart10-8Up-DownVolumeLineandRussell2000Chart10-9CommonOnlyA-DLineChart10-10FlashbackChart:2006-2008Chart10-11BondCEFA-DLineChart10-12NYSERatio-AdjustedA-DLineChart11-1-PercentAbove200-DaySMAChart11-2PercentAbove200-DayEMAChart11-3SmoothedPercentAbove200-DaySMAChart11-4DivergenceChart11-5PercentAbove50-DaySMAChart11-6PercentAbove50-DayEMAChart11-7PointandFigureBuyandSellPatternsChart11-8BullishPercentChart11-9BullishPercentBearishAlertChart11-10-BullishPercentExampleChart11-11-BullishPercentAnalogChartChart11-12UpandDownParticipationIndex

Chart11-13ADLineandCommonOnlyADLineComparisonChart11-14ADLinePerformanceandCommonOnlyADLinePerformanceComparisonChart11-15McClellanOscillatorandCommonOnlyMcClellanOscillatorComparisonChart11-16McClellanSummationandCommonOnlyMcClellanSummationComparisonTable12-1-BreadthIndicatorsCompositionandRankingTable12-2McClellanSummationStudyTableA-1-TimeFramesforAnalysis

ForewordbyTomMcClellan

Therehavebeenawholelotofreallyinterestingpeopleovertheyearswhohavefoundreallyinterestingwaystolookatthestockmarketbyvirtueofthebehaviorofallofitscomponentstocks.Thestorystartsin1926,whenLeonardAyresandhisassistantJamesHughesoftheClevelandTrustCompanywonderedwhatinsightsmightbegainedbylookingathowmanystocksgoupordowneveryday.

PreviousmarketanalystslikeCharlesDowhadmadecommentsaboutthosedatabefore1926,butAyresandHugheswerethefirsttoputittoadetailedstudy.Ayreswasafittingguytotakeonthatstudy,havingworkedasaneducator,economist,andstatistician.HehadevenservedasanArmycolonelworkinginlogisticsunderGeneralJohnJ.“BlackJack”PershingduringWorldWarI,firstdoingplanningforhowmanyshipsandotherequipmentwouldbeneededtodeployanAmericanforcetoEurope.Thathadneverbeendonebefore,soitneededtherightsortofmindstodotheplanning.AyresnexttalliedacountofU.S.Armybattledeathsduringthewar.

Tallyingthedailyadvancesanddeclinesamongstocksthatweretradedwasthusanobvioustaskforsomeoneworkingasaportfoliomanager.TherunningtotalofdailyadvancesanddeclinescametobeknownastheAdvance-Decline(A-D)Line,whichturnedouttohaveanimportantmessagetotellaboutthestockmarketinthelate1920s,ifonlyanyonehadknowntolistentoit.

TheA-DLinepeakedallthewaybackinMay1928,16monthsbeforethefinalpricetopfortheDJIA.Whenthestockmarketwasstillinabubble,and“everyone”wastradingstocksin1929,theA-DLineshowedthatmorestocksweredecliningonaveragethanadvancingeachday.

Moderntechnicalanalystsnowknowjusthowbearishitcanbewhenthereisa“divergence”likethisbetweenthemajorstockmarketaveragesandtheA-DLine.Butnooneknewitinthe1920s,sinceAyresandHugheshadjustthenstartedtotabulatethedata.

ItwasseveralmoreyearsbeforetheA-DLinegotmuchattention.Inthe1960s,itbecamealotmorepopularbecauseofthecommentsfromacoupleofindependentnewsletterwriters.JoeGranville(TheGranvilleMarketLetter)andRichardRussell(DowTheoryLetters)madenoteofhowtheA-DLinehadshownamajordivergenceversustheDJIAjustaheadofthe27%stockmarketdeclinein1962.Theideathatsomethingcouldforetellanuglybearmarketlikethatwasofobviousinteresttoalotofpeople.

OtheranalystssoonaftertookupthestudyoftheA-DLine,includingnotableslikeP.N.Haurlan(whofirstintroducedexponentialmovingaveragestostockpriceanalysis)andMartinZweig.Butevenbackthen,thecriticismwasthatthelistofNYSEstockswasundulyinfluencedby“interestsensitive”issueslikeinsurancecompanystocksandutilitiescompanies,whichwerenotconsideredtobe“real”stocksofcompaniesthatmakestuff.Thatcomplaintisstillwithustoday(seechapter10),althoughitturnsoutthathaving“uncommon”issueslikepreferredstocksandclosedendbondfundsarguablymakesthecompositeA-DLineanevenbetterindicatorofmarketliquiditythanthe“commononly”versionoftheA-DLine.

Inthisupdatedbook,GregMorrisgoesthroughthelonglitanyofothercontributorswhohavecomeupwithinnovativewaystolookattheA-Ddata,andothersetsofdatawhicharecollectivelyknownas“marketbreadth”indicators,includingNewHighsvs.NewLows,Up-DownVolume,andmore.Thisincludestheworkofmyparents,ShermanandMarianMcClellan,whofirststartedtheirintensivestudyofthebehaviorofA-Ddatain1968.Thatinquiryledin1969totheintroductionofwhatbecameknownastheMcClellanOscillator,whichexaminesthedifferencebetweentwoexponentialmovingaverages(EMAs)ofthedailyA-Ddifference.

Inthelate1960s,movingaverageswerejuststartingtobecomepopular,andtheirkeyinsightwastolookatthedifferencebetweentwomovingaverages.Itwasaninterestingbitofserendipitythat1969wastheyearwhenGeraldAppel

introducedawayoflookingatthedifferencesbetweentwomovingaverages,nowknownashisMovingAverageConvergence-Divergence(MACD)indicator.Thesesimultaneousdevelopmentsoccurredonoppositesidesofthecountry,andwithnocommunicationbetweenthem.

SinceGregMorris’firstversionofthebook,wehavelostseveralofthenotableanalystsandauthorsyouwillseefeaturedhere.JoeGranvillepassedawayin2013atage90,andwasstillwritinghisnewsletterupuntiljustbeforehisdeath.JimMiekka,whocreatedtheHindenburgOmen,wastragicallykilledin2014whenhewashitbyacar.MartinZweigalsodiedin2013.NelsonFreeburgdidnotsomuchdevelopindicatorsashefoundwaystotest,improve,andsystematizethem,andhepassedawayin2015.

ManyoftheotherslikeAyresandHughes,E.S.C.Coppock,P.N.Haurlan,KennedyGammage,BillOhama,andGeorgeLanewerealreadygone.WereitnotforGregMorris’exhaustiveeffortstocatalog,describe,andtesttheirindicatorsforourcollectivebenefit,theworksofthosepastmasters(andseveralcurrentones)mightbelosttofuturegenerationsoftechnicians.Soenjoythistreasurecollection.

TomMcClellanEditor,TheMcClellanMarketReportLakewood,WA

PrefaceThefirsteditionwentoutofprintinabout2012.WhileIthoughtitwasabookeveryonethatcouldreadwouldwant,Irealizedthatabookonanextremelyverticalsubject(breadth)inaverticalfield(technicalanalysis)justisn’tgoingtosellthatmany.Idon’thaveafinalcountonthenumberthatsold,butforafewyearstheroyaltieskeepmeinbeer,cigars,andanewsetofgolfclubseveryfewyears.ChipAndersonapproachedmeattheInternationalFederationofTechnicalAnalysisconferenceinSanFranciscoinOctober,2013aboutputtingtheindicatorsfromthisbookintoStockCharts.com’ssymbollibrary.Thatwasnotallthatexcitingtome,butthenhesaidwecanbuildaChartPackthathasachartofeverychartthatisinthisbook,sellaone-timesubscriptiontoit,andthesubscriberwouldhaveallchartsuptodateeveryday.Thiswouldgivethebookshelf-life,somethingIthoughtwasfantastic.Hence,thisupdatedSecondEdition,inKindleformat.YoucanfindmoreinformationabouttheChartPacksinAppendixC.

YoucanalsofollowmyramblingsonmyblogDancingwiththeTrend,onStockCharts.com.

AllofthechartsinthisupdatededitionareupdatedusingSharpChartsfromStockCharts.com.Imadeanumberofeditsfromtheoriginal,includingacompletelynewchapter(11)onnon-internalbreadthindicators.ThesearethePercentAbove,BullishPercent,Participation,andCommonOnlyIndicators.TakealookatChapter11,it’snew.Theotherthingthatisnewsincethefirstedition,isthatIhave5grandkids–allperfect.

Asistheacceptedstandard,andcertainlyinthiscasethefact,whateverfactualerrorsandomissions,aresadly,butmostcertainly,myown.

GregoryL.MorrisBigCanoe,GANovember2015

Prefacetothe2006Edition

“Lookbeneath thesurfaceof themarket. Breadth indicatorsholdawealthofinformation about the market’s condition, a condition that is not alwaysobvious.”

Marketbreadthisgenerallymisunderstood,misused,andmoreoftenthannot,itistotallyignoredbymost.Ibeganwritingthisbookinthemid-1990sbecauseIfeltthatitwastheonesubjectthathadnotbeenadequatelyaddressedinthemultitudeofbooksontechnicalanalysisandcharting.ManygoodbooksbysuchpopularnamesasJohnMurphyandMartinPringonlydevoteasinglechaptertothesubject.Asamatteroffact,IwashonoredtowritethechapteronbreadthinJohnMurphy’sbook,“TechnicalAnalysisoftheFinancialMarkets.”

FormanyyearsIhavewonderedwhytherewasnotasinglereferencedevotedtomarketbreadthindicatorsandanalysis.Maybethesubjectisn’taspopularorusefulasIthinkitis.Itmightbeadifficultsubjecttosell,sinceitdealswithmanyunfamiliardataitemsandcomponentsofthestockmarket.Well,I’mgoingtofindout,becausethisbookisdevotedtomarketbreadthindicatorsandwillcoverthetopicasthoroughlyandasaccuratelyaspossible.Ihavebeencollectingbreadthrelatedmaterialforovertwentyyears.Ifirmlybelievethattheunderstandinganduseofbreadthindicatorswillgiveyouanedgewhenitcomestoyouranalysis.

Breadthanalysisalsoseemstobetheonesubjectthatdoesnotgarneragreatdealofinterestfromthefinancialmedia.Itrulybelievethatisprobablyagoodthingsincetheymightdoitaninjustice.Ifyoudon’tunderstandsomething,youprobablyshouldn’ttalkaboutit.Gleaninginformationfrommarketbreadthdataandbreadthindicatorsistrulyoneofthemostconsistent,ifnotthebestmethodformarketanalysis.Breadthdataissimplythebestmeasureofmarketliquiditythereis.Thisbookwillattempttoprovethat.

Solidanalysiswithadefinedplanofactioniscriticalforinvestmentsuccess.Youshouldalwaysunderstandthattheanalysismaybeflawedandthattheinvestmentdecisionsmightneedtobereversed;andthatisjustpartofagoodsolidplan.Duringabullmarket,anyonecanbuyjustaboutanystockandappeartohaveaninsightintothemarkets.ThisremindsmeoftheoldWallStreetaxiom:don’tconfusebrainswithabullmarket.However,thetableturnswhenthemarketturns.Thebubblemarketthatendedinearly2000-isaclassicexample.Howmanyfolksheldontotheirpositions,firmlybelievingthatthemarketwouldcorrectitselfandthencontinueitsinsaneclimbtoloftyheights?Themarketshaveauniquecleansingaffectattimes;andinthecaseofthelastbullmarket,itwaslongoverdue.Usingmarketbreadthasananalysistoolisessentialtoasolidandsuccessfulinvestingstyle.Youmustutilizesomemeansofcontrollingyouremotions.Breadthanalysisistheanswer.IhaveexpandedviewsonthisandpersonalopinionsonlotsofthingsintheIntroduction.

Thisbookislaidoutinatextbookmanner,witheachbreadthsubjectadheringtoafairlyrigidformat.Itcanbereadfromcovertocover,orusedasareferenceguidewhendesiringinformationaboutaparticularbreadthindicatorortopic.Forthosenottoofamiliarwithbreadth,IwouldrecommendthatyoureadeverythinguptothechaptersonBreadthIndicators(Chapters4-11),priortotacklingthosechapters.Thechaptersthatdelveintotheactualbreadthindicators(Chapters4-11)canbestudiedaftertheothermaterialisunderstood.Theycanbereadinsequenceorusedlikeanencyclopediaandlookupthedetailsonaparticularbreadthindicator.Chapter2isimportantasitexplainsallthevariancesandterminologythatisneededtoassistinunderstandingthechaptersonthebreadthindicators.Ifyouweretopickonlyonechaptertoreadinpreparationforreadingthebreadthindicatorchapters,chapter2wouldbetheone.

Iusedthecleanchartconceptforthemorethan190-chartsinthisbook.Onoccasion,Ihighlightedsomethinginparticularonachart,butmuchmoreoftenthannot,thedescriptionwasmadeinthetextthatisassociatedwiththechart.Theintentionwasthatyoucouldtakeastraightedgeandalignthedatatoseesignalsmuchbetterifthechartswerenotcluttered.Ialsoinsistedthattheybedisplayedinportraitmodesothatyoucouldviewthemwithouthavingtoturnthebook90-degrees.

IntheIntroductionIhavetakenthelibertyofpointingoutanumberofmisconceptionsthatIbelieveareprevalentinthefinancialmarketplace.Someothersaresprinkledthroughoutthebook,hopefullyinanappropriateplace.ItwasnotmyintenttooffendanyonewhoadaptsoradherestoatechniquethatIbelieveisnotcorrect,justmyconcernthattheymaynotfullyunderstandit.InafewplacesIrantedexcessivelyandwasquitepossiblycontroversial.

InChapter12,Conclusions,Ihaveprovidedatableofallindicatorsarrangedintheordertheywerepresentedinthebook.Ishowwhatbreadthcomponentsareusedintheindicator,whethertheindicatorworkedbetteratmarkettops,bottoms,orfortrendanalysis,andwhetherornottheindicatorwasshortorlongterminnature.Ialsotookthelibertyofofferingalistofmyfavoritebreadthindicators.AshortdiscussionontheimportanceoftheMcClellanSummationIndexisalsopresentedtoshowitsvalueinyourinvestmentapproach.

GregoryL.MorrisBigCanoe,Georgia

AcknowledgementsIwasblessedwithlovingandcaringparents,DwightandMaryMorris.Theyarealmostsingle-handedlyresponsibleforanygoodthatIhaveeverdone.AsIsaidinmy1992book“CandlestickChartingExplained,”andisstilltruetoday,anythingbad,surelymusthavecomefrombeingaNavyfighterpilot.IowealifetimedebtofthankstoKeithandIreneEppler.TheyguidedmeinmyyoungeryearsandKeithsparkedtheflyingbug–abugthatledtoover21,000-flyinghoursstartingin1967andflyingeverytypeofaircraftimaginable.Whenyoureadmybiographyneartheendofthisbook,itreadslikesomeonewhocan’tholdajob,thatis,untilyougettothepartthatallalong,duringalltheotherendeavors,Iwasacaptainforamajorairline.

Earlyinmyinvestmentlife,mygoodfriendTomZellnerintroducedmetoabookbyMichaelZahorchakcalled“TheArtofLowRiskInvesting.”Zahochak’smeasureisnowpartofthisbook.Beinganengineer,Ihadpreviouslymovedtowardthetechnicalsideofmarketanalysis,butthiswasthebookthatsolidifiedmybeliefinthatapproach.BeforethatIwasstumblingalongwithearningsreports,productanalysis,managementstyles,andgenerallyawidearrayoffundamentalratiosandinformationthatneverseemedtohaveanythingtodowiththestockpricemovements.Itsuremademefeelgoodthough,tobuyastockbecausethefinancialratiosweregood.Fortunately,Iquicklylearnedthatfeelinggoodhasverylittletodowithmakingmoneyinthemarkets.

Intheearly1980sIhadtheprivilegeofworkingwithNormanNorth,ofN-SquaredComputing.WepumpedoutalotofDOS-basedchartingandanalysissoftwarebackthen,includingthefirstprogramtoautomaticallyidentifyJapanesecandlepatterns.Anotherproductwedevelopedwasonethatanalyzedbreadthdata,usuallythatwhichwasavailablefromtheBarron’sMarketLaboratorypages.Onecustomerforthatproductbecame,andremainsagoodfriend,RonSalter,ofSalterAssetManagement.

AspecialthankstoTomMcClellan,oftheMcClellanMarketReport,whotirelesslyrespondedtoquestionsIhadabouttheMcClellanindicatorsand,withhisdadSherman,providedsomegoodmaterialforthisbook.ShermanandTomalsowroteanewForewordandcompletelyupdatedChapter10.

ThanksalsotothelateJimMiekka,oftheSudburyBullandBearReport,forhisthoroughanalysisoftheMcClellanSummationindexanddetailsonhis

HindenburgOmenindicator.Jimaddedsignificantlytothevalueofthisbook.

ThankstoDickArmswhowroteashortpieceabouthisthoughtprocesswhencreatingtheArmsIndexin1967.

GeorgeSchadeprovidedtwoarticlesthathehadpublishedwiththeMarketTechnician’sAssociation.Thefirst,“HowtheAdvance-DeclineIndicatorsCameAboutfromObservation,Logic,andPerseverance”appearsinChapter1.Thesecond,“TheMisnamedIndicator”appearsinChapter6.

Thefollowingindividualsalsodeserverecognitionfortheirunselfishassistancewiththecreationofthisbook.

LynnDufrenne,ofMetaStockassistedmewithsomecodingissuesforsomeoftheindicators.

CarlSwenlin,ofDecisionPoint(www.decisionpoint.com)wasagreatsourceforindicatordetailsandhistoricalinformation.DecisionPointisnowpartofStockCharts.com.

JohnMcGinleyofTechnicalTrendshelpedwithsomeoftheoldbreadthindicatorsthatseemtohavedisappeared.JohnwasArthurMerrill’ssidekickandproducedtheTechnicalTrendsservice.

DennisMeyers,ofMeyersAnalyticsgavemethecodeforsomeofhisadvancedcompositeindicators.

EdPavia,ofPinnacleData,forprovidingqualityandreliablebreadthdata.

NickLairdofwww.sharelynx.com,forofferingtheuseofhisgiantmarket-relateddatabase.

StephenIsaacsofMcGraw-Hillwasadelighttoworkwith.

Andsavingthebestandmostimportantforlastismylovingandwonderfulwifeandpartner,Laura.Sheisalwaysthereforme.

Asistheacceptedstandard,andcertainlyinthiscasethefact,whateverfactualerrorsandomissions,aresadly,butmostcertainly,myown.

BreadthHallofFame

Iwouldliketohonorthefollowingindividualswhohavemadesizeablecontributionstobreadthmarketanalysis.Thisreallyisnotawisethingtodofor

fearofleavingoutsomeonewhobelongsinthislist.Afterovertwentyyearsofcollectingmaterialandresearchingthesubjectofbreadth,thefollowingnamessurfacedoftenandusuallywithlastingandimportantcontributions.Ifanyonewasnotincludedthatshouldbeitistotallymyoversight.Ifyouareconvincedthatsomeonewasnotincludedthatshouldbeonthislist,pleaseletmeknow.

GeraldAppel

RichardArms

LeonardAyres

TusharChande

NedDavis

NormanFosback

JosephGranville

TimHayes

P.N.Haurlan

JamesHughes

MarianMcClellan

ShermanMcClellan

TomMcClellan

JohnMcGinley

ArthurMerrill

RichardRussell

MartinZweigHaroldM.Gartley

CH1-INTRODUCTION“Thenoblestpleasureisthejoyofunderstanding.”LeonardodaVinci

Howcanyouevenbegintopredictorforecastthemarketifyouarenotusingthecorrecttoolstodetermineitspresentstate?Ifyoudonotfullygraspthepresentstateofthemarket,yourprediction,whetherrealoranticipated,willbeoffbyanamountequivalenttoatleasttheerrorofyourcurrentanalysis.Andyourerrorwillbecompoundedbaseduponthetimeframeofyourpredictionorforecast.Breadthanalysisislikequantummechanics,itdoesnotpredictasingledefiniteresult,insteaditpredictsanumberofdifferentpossibleoutcomes,andtellsushowlikelyeachonewillbe.Breadthdirectlyrepresentsthemarket,nomatterwhattheindicesaredoing.Itisthefootprintofthemarketandthebestmeasureofthemarket’sliquidity.

Marketbreadthindicatorsarethoseindicatorsthataresometimesreferredtoasbroadmarketindicators.Probablythesimplestwaytothinkofthemistorealizetheygenerallydonotreferto,oruseinformationrelatingtoanindividualissue.Breadthwilltreatallstocksinanindexequally.Thestockwiththelargestcapitalizationandthesmallestarebothequalinbreadthanalysis.Mostbreadthanalysisistotalmarketrelatedinthatitdealswiththecompletemarket.Arisingtideraisesallshipsisthemorepicturesquewaytograspitsmeaning.

Marketbreadthusesmarketdatasuchasadvancinganddecliningissues,newhighsandnewlows,upanddownvolume,etc.Thisisanareaofmarketanalysisthatdealsonlywiththestockmarketanddoessoinagenericway.Itcannotbeusedonindividualstocks,mutualfunds,orfutures.Itisabroadapproachtooverallmarketanalysisthathelpsinvestorsandtradersrealizetheunderlyingstrengthorweaknessassociatedwithamarketmove.TheanalysisnormallyisdoneontheNewYorkmarket,theAmericanstockexchangemarket,andtheNasdaqmarket,butcanbeappliedtoanyexchangeorindexofsecuritiesforwhichbreadthdataisavailable.

Actually,breadthcalculationscanbeaccomplishedonanysectorofthemarketorindustrygroupaslongasyouhaveamethodofdeterminingthecomponentsmentionedabove.I’mquitecertainthatwiththeexplosiveuseofcomputersforanalysis,thisisjustaroundthecorner,ifnotalreadybeingdoneinsomeplaces.

TechnicalAnalysis“Iknowofnowayofjudgingthefuturebutbythepast.”PatrickHenry

Thesubjectofmarketbreadthindicatorsfallssquarelyintothefieldoftechnicalanalysis.Whatistechnicalanalysis?Booksarefilledwithdefinitionsandinterpretationsontechnicalanalysis.Asignificantpartoftechnicalanalysisistheartofstudyingthepast,attemptingtoidentifyapatternoreventthatseemstorepresentorreflectthemarketbeingstudied,andthenbelievingthatitwillworkwithsomecertaintyintheforeseeablefuture.

Mydefinitionfortechnicalanalysisandmyadherencetousingitcomesfromabeliefthateveryoneneedssomethingtobelieveinorrelyupon.Ibelieveintechnicalanalysisbecauseofitscloserelationshiptothesupplyanddemandofthemarket.Fundamentalanalysis,whichisbyfaramorepopularmethodofanalysis,isgenerallyflawedinthatitdoesnotaddresstheissueof‘when.’WhenshouldIbuyorwhenshouldIsell?Researchingthehundredsofdifferentfundamentalratiosisthefulltimejobofthousandsofsecuritiesanalysts.However,thinkaboutthissimplefact.Almostallfundamentalratiosinvolveprice.Sowhynotanalyzeprice?Mostformsoftechnicalanalysisdojustthat.

Istechnicalanalysisthesameasmarkettiming?Sometimesitis,sometimesitisn’t.Markettiminghasreceivedabadrap,especiallybythosewhobelieveitisaprocessbysomewhoblindlyfollowsomeover-optimizedmechanicalsystemwithoututilizingmoneymanagementoranassetcommitmentplan.Inthatregard,itsbadrapisappropriate.Theanalysisofriskandrewardisnotmarkettiminginthesensethatmanythinkofwhenusingthatoftenmisusedterm.Determiningwhenthemarkethastoomuchriskisnotmarkettiming,butprudentanddiscretionaryinvesting.Nexttimeyouhearabrokeragefirmanalystmentionthatnoonecantimethemarket,orthattechnicalanalysisdoesnotwork,asktoseehisrecordduringthebearmarketof2000–2002or2007-2008.

Anotherchallengetotechnicalanalysisisthatofwhetheritisanartorascience.Icannotbelieveanyonewouldseriouslyaskthis,andsuspectthequestioncomesalmosttotallyfromthenon-scientificortheinnumerateamongus.Idobelievethatscientists,engineers,andmathematically-inclinedinvestorsmigratetowardtechnicalanalysisovertimebecauseofitsabilitytolookbackinhistoryandseehowsupplyanddemandplayedout.Itiscertainlyamore

analyticalapproachtomarketanalysis.

Thosewhogetexcitedandexperienceawarmfeelingabouttheoverusedadjectivesofquality,strong,healthy,etc.whenwallstreettalksaboutinvestinginspecificcompaniesaresurelytheoneswhothinktechnicalanalysisiswitchcraft.YearsagowhenIusedtobeentertainedbywatchingWallStreetWeek,andwashumoredbythefundamentalanalystswhowouldtalkendlesslyabouthowtheylikedtopickgoodqualitycompaniesandholdontothem.TheythenquicklypointouttheIbbotsonstudythatshowsthatequitieshaveperformedatabouta9%annualrateforthelastonehundredyears.Hogwash!Whilethestudyistrue,itistotallyirrelevantasonedoesnothaveaone-hundred-yearinvestmenthorizon,andisthereforenotapplicabletohumans.Mostinvestorshaveagoodfifteentotwenty-yearperiodinwhichtomaketheirseriousinvestments.Thereweremany,manyfifteentotwentyyearperiodsinthelastonehundredyearsthatresultedinnegativereturns.Themostegregiousexampleisifyouhadboughtin1929,youdidnotbreakevenuntil1954;twenty-fiveyearslater.Andguesswhat,gettingevenisnotwhatinvestingisallabout.

Agooddetectivewilltellyouthatsomeoftheleastreliableinformationcomesfromeyewitnesses.Whenpeopleobserveanevent,itseemstheirbackground,education,andotherinfluencesunrelatedtotheobservedevent,colortheirperceptionofwhatoccurred.Mostwillalsobeinfluencedbywhattheyhearfromothers.Thisisalsoamplifiedbyanumberofindividualstudiesdonebybehaviorpsychologists.Inanutshell,theyallagreethatgroupsofpeoplewilltendtoamplifytheconsensusviewratherthanchallengeit.Agroup’sabilitytofocusoncommonknowledgeanduncoveranythingnewiscommonplace.Plus,thefactthatifsomeoneinthegroupisacknowledgedasanexpert,theiropinioncantotallydominatethethinkingforthegroupandcanleadtowhatisknownasthe“herd”mentality.Talkradioisaperfectexampleofthis.

Oneshouldrememberthatthingsarequiteoftennotwhattheyseem.Itisabsolutelyamazingtomehowmuchpeoplebelievethatwhichisnottrue.Somebelievewaterrunsoutofabathtubfasterasitgetstowardtheend.Assumingthetub’ssidesarestraight,thepressureisconstant,itonlyappearstodrainfasterbecauseyouobserveitstartingtoswirltowardtheend,somethingyoucouldnotobservewhenthetubwasfull.HowmanythinkthatGeorgeWashingtoncutdownacherrytree?GeorgeWashingtondidnotcutdownacherrytree.Thatwasastorytoldsothatadultscouldteachtheirchildrenthatitwasbadtotelllies-evenourfoundingfatherdidn’ttelllies.ParsonMasonLockeWeems,theauthorwhowroteaboutit,wastryingtohumanizeWashington.Question:Did

WashingtonthrowasilverdollaracrossthePotomacRiver?Hint:ThePotomacRiverisalmostamilewideatMountVernonandsilverdollarsdidnotexistatthattime.WhatabouttheBattleofBunkerHill?ItwasfoughtatBreed’sHillinCharleston,Massachusetts.Here’soneofthebest:Dogssweatthroughtheirtongues.Guesswhat?Dogsdon’tsweat.Theirtongueshavelargesalivaryglandsthatkeepthemwet.Okay,onemore!Hedrinkslikeafish,butfishdon’tdrink.Hopefully,youaregettingmypoint.Inthelastfewyearstheinternethasbeenthesourceandexploitationofmuchhypeandfalseinformation.Howmanytimeshaveyoureceivedanemailfromafriend(whoprobablydidnotoriginateit),andbelievedittobetruebutdidnotbothertocheckitout,butforwardeditanyhow?Youshouldstartverifyingthembecausemanyofthemareahoax.Believablemisinformationflourishes.

Idon’twanttoturnthisintoasciencebook,butIamadamantaboutcorrectingtheproliferationofbadorincorrectinformationthatexistsinthefinancialmarketsandbyshowingyousimilarmisconceptionsthatyoumayhavebelievedbeforeisthebestwaytogetyourattention.Ifyoubelievedoneormoreoftheabovemisconceptions,thenhowmanymarket-relatedonesdoyoualsobelieve?

Technicalanalysiswillletyoudealwithrealityandkeepyoufromfallingvictimeverytimetheeveningnewsofferstheirexpertopiniononwhythemarketsdidtodaywhattheydid.AsIwritethistheIndonesianearthquaketidalwaveshavekilledthousandsofpeople,butyoucannotbegintoknowhowmany.Mostnewssourcesarestatingguessesanywherefrom15,000towellover150,000.Manynewssourcescannotevenkeepthenumberconsistentwithintheirownarticles.Doyouthinktheycanalsotellyouwhythemarketsdidwhattheydidonadailybasis?Sticktotechnicalanalysis,itwillincreaseyourunderstandingofthemarkets,ifonlybythefactthatyouareuncoveringinformationaboutmarketbehavior.

HerearesomecommentsontechnicalanalysisthatIreadover30yearsagoin“TheCommoditiesFuturesGame”byRichardTeweles,andbelievetobejustasvalidtoday.Almostallmethodsoftechnicalanalysisgenerateusefulinformation,whichifusedfornothingmorethanuncoveringandorganizingfactsaboutmarketbehaviorwillincreasetheinvestor’sunderstandingofthemarkets.Theinvestorismadepainfullyawarethattechnicalcompetencedoesnotensurecompetentinvesting.Speculatorswholosemoneydosonotalwaysbecauseofbadanalysis,butbecauseoftheinabilitytotransformtheiranalysisintosoundpractice.Bridgingthegapbetweenanalysisandactionrequiresovercomingthethreatofgreed,hope,andfear.

Technicalanalysisistheartofanalysisthatwillkeepyouremotionsfrombeingapartofyourinvestmentdecision-making.Whilenotfallible,itcertainlygivesyouthetoolstodoso.Itwillalsoassistyouinovercomingthehumantraitsofignoranceandbliss.Ignoranceisanintellectualstateandappearstobechronicinmanypeopleasregardstothestockmarket.Blissisanemotionalstateanditcharacterizesmanyinvestorsaslongasthemarketisgoingup.Deludedbyemotions,onecannotbegintobesuccessfulintheinvestingarenawithoutsomemeansofcontrollinggreed,fear,andhope.Thisiswhattechnicalanalysisdoes.

TechnicalIndicators“Thosewhocannotrememberthepastarecondemnedtorepeatit.”GeorgeSantayanna

AnindicatorisdefinedbyWebsterasapointerordirectingdevice,aninstrumentformeasuringorrecording.Whatthenisatechnicalindicator?Technicalindicatorsaremathematicalmanipulationsofdatasothatspecificvaluesorlevelscanreflectthemarketorsecuritybeingindicatedupon(analyzed).Thereareothertypesofmarketindicatorsthatarecommonlyused,suchas:economictimeseries,interestrates,etc.Stockmarketindicatorsutilizeopen,high,low,close,volume,andopeninterestwhicharethebasiccomponentsofstockandfuturesdata.Here,wewillusemarketbreadthindicators.

“Hewhodoesnotknowthesupremecertaintyofmathematicsiswallowinginconfusion.”LeonardodaVinci

Ihopethatthementionofmathematicsdoesn’tscareanyone.Youdon’talwayshavetounderstandmathematicstoknowthatitwillwork.MostpeoplebelievethatLeonardodaVinciwasamathematician,whenhewasactuallyfarfromit.HehadaclosefriendshipwithLucaPacioli,whoinspiredLeonardo.Leonardodid,however,createanumberofmathematicalinstrumentsandmeasuringdevices,buthisknowledgeofmathematicswasnotexceptional;hisfriendshipwithone,whosemathematicalknowledgewasexception,waswheretheconfusionmaylie.Onewordofcautionhere,donotconfusemathematicswithnumerology.

Asimplemathematicalseriesofnumberscansometimesgetmisinterpreted(promoted)tobesomethingmagical.Personally,IseenovalueintheactualnumbersthatmakeuptheFibonacciseries;aseriesdevelopedbyanItalianmathematician(Fibonacci)inthethirteenthcenturytohelpunderstandthepropagationofrabbits.FirstImustsaythatIdovaluetheratioofthenumbersthatareexpandedinaFibonacci-likeseries(1,1,2,3,5,8,13,21,34,55,89,…).Thatratiois0.618(anditsreciprocal1.618),oftencalledthegoldenratiobecauseofitswideoccurrenceinnature.Hereisafact:theactualnumbersintheFibonacciserieshavelittletodowiththeratio.Anytwonumbersexpandedinthesamemannerwillproducethesame‘golden’ratio.Hereisatest:Tryitwith2and19.Addthemtogether,andthenaddthetotaltothepreviousnumber

justlikeintheFibonacciseries(2+19=21,19+21=40,21+40=61,etc.).Expandthisuntilyougettosomefourdigitnumberssothattheaccuracywillbeacceptable(2,19,21,40,61,101,162,263,425,688,1113,1801,2914,4716,…).ThelasttwonumbersinthissequencearethetwonumbersthatIwilluseforthisexample:2914and4716.Nowdividethefirstnumberbythesecondnumberandyouwillget0.618.ThisisexactlythesameaswiththeoneobtainedusingtheFibonacciseriesofnumbers.SowhydidIpick2and19forthisexample?Hint:thesecondletterinthealphabetisB.Thinkaboutit.Whatisthenineteenthletter?Andthatiswhatnumerologyisallabout.Onelastthing,theFibonacciseriesalsofailedatunderstandingorpredictingthepropagationofrabbits.Itistheratiothatisimportant,nottheactualnumbersintheseries.So,whenyouhearsomeonesaytheyaregoingtousea34daymovingaveragebecause34isaFibonaccinumber,youcanimmediatelybegintodoubttherestoftheiranalysis.

Mostbreadthindicatorsareatbest,coincidentindicators,andusuallysomewhatlagging.Anyoftheindicatorsthataresmoothedwithmovingaveragesarecertainlylagging.Laggingmeansthattheindicatorisonlytellingyouwhatishappeningafterithashappened.Laggingisnotaproblem,onceyourealizethatpickingexacttopsandbottomsinthemarketisbetterlefttogamblers.Theconfirmationoflaggingindicators,however,isveryimportant.Somebreadthindicators,especiallysomeoftheratios,canofferleadingindicationsbasedupontheidentificationanduseofpreviouslevelsorthresholdsthatareconsistentwithsimilarmarketaction.Anoscillatorthatreachedathresholdlevel,eitherpositiveornegative,withconsistencyrelativetomarkettopsandbottomsissuchanindicator.Manybreadthindicatorsworkinthismanner.

Noindicatorisrightallofthetime;fortunately,youdon’thavetoberightallofthetime.Youjustneedtoensurethatyoudonotholdontolosersandkeepyouremotionsoutofthegame.Choosesomegoodreliableindicatorsandstickwiththem.Learnhowtheyrespondduringdifferentmarketenvironmentsandmastertheinterpretationofthem.Andremember,whenyourfavoriteindicatorfailsyou,avoidthinkingthatthistimeisdifferent,itprobablyisnot.

DrawingTrendlinesonCharts

Almostallreferencesonsupplyanddemandaredirectlytiedtoprice.Thisinvolvesthepricingofgoodsandservices,aswellassecurities.Itseemsthatsomeanalystshavenotunderstoodthisconceptanddrawtrendlinesalloverachartwithoutanyrealunderstandingastowhatitistheyaretryingto

accomplish,unless,ofcourse,itistosupport(sic)theirhypotheses.

Canyouusesupportandresistanceforoscillators,ratios,andaccumulatedvalueslikeyoudowithprice-basedissues?Ibelievethisiscarryingthesupplyanddemandanalysisalittletoofar,yetmanyanalystsaredoingit.Cananoscillatormadeupofinternalbreadthcomponentshaveasupportlineoraresistanceline?No,butitcanreachcertainlevelsonaconsistentbasisandifthatiswhatisbeingrepresented,thensobeit,butitisnotsupportorresistance.Similarly,Iseesomewhowilldrawtrendlinesacrossmovingaveragepeaksortroughs.Thisisirrelevantanalysisanddoesnotrepresentanytypeofsupportorresistance.Likemostthings,thereareexceptionstoallthis.Ananalystmaypointoutthatthe200daymovingaverageofferssupportfortheissuebeinganalyzed.Thismaywellholdouttobetrue,onlybecauseofthatparticularmovingaverage’spopularity.Itprobablywouldnotholdtrueifanaveragethatislessfamiliaroratotallyrandomaveragewerepicked,say163periods.

Also,andinfairnesstotheseanalysts,drawingtrendlinesonsomeindicatorssuchastheadvancedeclinelineisnotdonetoidentifysupportandresistance,buttoassisttheanalystinidentifyingdivergencewithprice.Thisexampleshouldputitinperspective.Youcannotrelateratesofchangelinearly.SunCityis20milesfromKeith'shomeinPratt.Hedrives60mphgoingtoameetinginSunCitybutcominghomehedrives30mph.Whatishisaveragespeedforthetimeheisontheroad?GoingtoSunCitytook1/3ofanhour.Cominghometook2/3ofanhour.Sothetotal40milestookonehour.Therefore,theaveragespeedis40mph.Manywillbelieveitwas45mph((60+30)/2).Youcannotaverageratesofchangelikeyoucanconstantsandlinearrelationships.Distanceisratemultipliedbytime(d=rt).Wearedealingwiththeharmonicmeanhereandnotaveragerates.Thisisonereasondrawingtrendlinesonratesofchangeoscillatorsisnotsupportandresistanceidentification.

AFamiliarBreadthIndicatorMostinvestorsarefamiliarwiththelong-runningFridaynightshow,WallStreetWeek,onPublicBroadcastinghostedbyLouisRukeyser,who,everyweekwouldcommentonhiselves(histermfortechnicalanalysts)andtheWallStreetWeekIndex.Whatyoumaynothaveknownisthatthisindexwasacompositeoftenindicators,threeofwhichwerebreadth-based.RobertNurock,long-timepanelistandChiefElf,createdit.RobertNurockwastheeditoroftheAstuteInvestor,atechnicalnewsletterformanyyears.

TheArmsIndexwasoneoftheindicatorsintheWallStreetWeekIndex.A10daymovingaveragewasusedwithbullishsignalsgivenwhenitwasabout1.2andbearishwhenitwasbelow0.8.Theadvancesminusthedeclineswereusedovera10-dayperiodandbullishsignalswerefromthepointwheretheindexexceeds1000toapeakanddowntoapoint1000belowthepeak.Bearishsignalswerejusttheopposite.Thethirdbreadthindicatorusedwasthenewhighscomparedtothenewlows.Forbullishsignalsanexpansionofthe10-dayaverageofnewhighsfromlessthan10upto10-dayaverageofnewlows.Similarly,bearishsignalswereanexpansionof10-dayaverageofnewlowsfromlessthan10untilitexceedsthe10-dayaverageofnewhighs.

BreadthRelationshipsInthechaptersonBreadthIndicators(Chapters4-11),youwillseethesemarketcomponentsusedinalmosteveryconceivablemethodandmathematicalcombination,bythemselves,orincombinationwithotherbreadthcomponents.Aftertheyaremathematicallyarranged,theyarethenagainsmoothed,averaged,summed,andnormalized.

Therearesomebasictenantsthathavebeencreatedovertheyears;eachonehasitsplaceinanalysishistoryandherewewillnotattempttosaywhichisbetterorworse.Hereisalistofvariousadvancedeclinerelationshipsandtheanalyst(s)thatis(are)creditedwithinitiallyusingthem.Manytimestheywerethefirsttowriteaboutthem.Astudentofthemarketwillrecognizemanyofthesenames.

Theprimarybreadthcomponentsforthisexampleare:Advances=A,Declines=D,Unchanged=U.Acomponentbetween||meansabsolutevalue.Forexample,theabsolutevalueof3is3andtheabsolutevalueof-3isalso3.

Similartypesofrelationshipscanbemadeusingnewhighs,newlows,upvolume,anddownvolume,buttheadvancedeclinerelationshipisusedthemost.

IntheBeginning…

Whowasthefirsttousebreadthformarketanalysis?Andwhen?

GeneralLeonardP.Ayers,ofClevelandTrustCompany,isgenerallycreditedwithbeingthefirsttocounttheadvancingissuesanddecliningissues.In1926,heproducedhisfirstwork,whichhecalled“makingthecountofthemarket.”However,twenty-fiveyearsearlier,CharlesH.Dow,ofDowTheoryfame,commentedinhisJune23,1900editorialintheWallStreetJournalaboutthenumberofadvancesanddeclinesthusly,“Ofthese174stocks,107advanced,47declined,and20stoodstill.”However,itiswidelyacceptedthatGeneralAyersandhisassociate,JamesF.Hughespopularizedtheconceptthatiswidelyusedtoday.

MygoodfriendGeorgeSchade,lawyer,researcherextraordinaire,andconfidanthasgivenmepermissionalongwiththeMarketTechnician’sAssociation(MTA)toreproduceanarticleGeorgewrotein2013.YoucanalsoviewitontheMTA’slibraryinIssue67,page46oftheJournalofTechnicalAnalysis.Thelinkishttp://docs.mta.org/journal-ta/jota67_2013.pdf.

HowtheAdvance-DeclineIndicatorsCameAboutfromObservation,Logic,andPerseverancebyGeorgeA.Schade,Jr.,CMT

Abstract

InSeptember1927,theClevelandTrustCompanypublishedthefirstAdvance-DeclineLineoriginatedbyLeonardP.AyresandhisassistantJamesF.Hughes.Forthenextthreedecades,HughesappliedandexpandedthecountofthemarketwhileaddingtheAdvance-DeclineRatiotothegroupofmarketbreadthindicators.After1958,RichardRussellpopularizedtheinnovativeworkofAyresandHughes.Today,theseindicatorshavewidefollowing.

I.Introduction

InSeptember1927,thefollowingchartappearedonthelastpageoftheClevelandTrustCompany’s

BusinessBulletin:

Figure1–TheFirstPublishedAdvance-DeclineLine,1927

STOCKPRICECHANGES,SHARESTRADED,ANDISSUESDEALTIN,DAILYIN1927

TheBulletinexplainedthatthelineinthetopsection“doesnotshowtheaveragepricesofagroupofstocks,butratherforeachdaythepreponderanceofadvancesoverdeclines,orofdeclinesoveradvances,amongalltheissuesdealtinduringthatmarketsession.Itshowsthechangingdailytrendofthemarketasawhole.”(BusinessBulletin,1927)ThechartshowedthetrendbetweenJanuaryandAugust1927.Theothertwolines,correctlynamed,werea“six-daycenteredmovingaverage”ofthenumberofsharesandissuestraded.(BusinessBulletin,1927)

Thechartwasthefirstdepictionofanadvance-declineline.ThewriterwasLeonardPorterAyreswhoiscorrectlycreditedwithoriginatingtheAdvance-DeclineLineindicator.Twenty-fouryearslater,hisassistantJamesF.Hughesrecalled“thefirstcountofthemarket”whichAyreshadcompiledandshownhim“onemorninginJanuary1926,”onasheetofpaperfromayellowpad.HughesbecameAyres’assistantin1923.

WhenAyresshowedHughesthe“firstcountofthemarket”Hugheshadseen,Ayrestoldhim,“Ithinkthiswillmakeaninterestingstockmarketstatistic.”(Hughes,1951)Thephrase“countofthemarket”hasbeenattributedtoAyres,butHugheswrotethatthetermwaswhatHughescalledthe“routinedailyreporting”ofadvances,declines,andunchanged.(Hughes,1951)

Thisisthestoryofhowtheforemoststatisticianofhistimeconceivedatechnicalconceptwhichhisassistantappliedandexpandedbuildingthe

foundationoftoday’sadvance-declineindicators,astorythatlastednearlyfortyyears.Seventy-fiveyearslater,advance-declineindicatorsarerelieduponbytechnicianseverywhere.

II.LeonardPorterAyres(1879-1946)

AyreshasbeenreferredtoasColonelAyres,andhewasaUnitedStatesArmyColonelin1920whenhebeganworkingattheClevelandTrustCompany.However,in1940hewasrecalledtoactivedutywiththerankofBrigadierGeneral.Thereafter,thepressreferredtohimasGeneralAyres.

Figure2–LeonardPorterAyres

Portraitisbypermissionofwww.asapresidentialpapers.infohostedbyNationalOpinionResearchCenter,UniversityofChicago,fortheAmericanStatisticalAssociation(www.amstat.org).

AyreswasborninNiantic,Connecticut,onSeptember15,1879.2HeattendedpublicschoolsinNewton,Massachusetts,andin1902graduatedfromBostonUniversity.HetaughtEnglishinPuertoRico;in1906hebecamethesuperintendentoftheisland’sschoolsystem.In1910,AyresreceivedaPh.D.degreefromBostonUniversity.

Statisticalanalysiswashisprofessionalcareer.Between1908,whenhewasappointedDirectoroftheDepartmentofEducationandStatisticsattheRussellSageFoundation,and1917,heappliedstatisticalmethodstoeducational

practices.Ayreswrotenumerousmonographsdocumentingtheapplicationofstatisticstolearningprograms.

Asapreviewofhiseconomicstatisticalcareer,in1915,Ayrespublishedaninnovativescaleformeasuringabilityinspelling.Thescale(republishedin1985)hasbeencalled“oneofthemostelegantandcarefullystandardizedtestsavailableinthedomainofliteracy.”(www.arlingtoncemetery.net)

DuringWorldWarI,LieutenantandthenMajorAyresorganizedthemilitary’sDivisionofStatistics.HewasthechiefstatisticalofficeroftheAmericancommissiontonegotiatepeace.

Between1940and1942,AyresservedintheUnitedStatesArmy.HewasawardedtheDistinguishedServiceMedal,thehighestnon-valorousmilitarydecorationgivenforexceptionallymeritoriousservicetotheNation.

AftersufferingaheartattackhediedathomeonOctober29,1946.Announcinghispassingaway,TheNewYorkTimesrememberedthat:Hewasoneofthefeweconomistswhomadepersistentlypessimisticpredictionsontheeveofthe1929crash.Hedeclinedtoagreethatthecrashwasonlyasixty-dayperiodof‘businesscorrection’andinsisteditwasoneofthemajordepressionsinAmericanhistory.(LeonardAyres,67,EconomistisDead,1946)

TheAmericanStatisticalAssociation,ofwhichAyreswaspresidentin1926,wroteinmemorialappreciation:Fewhavenurturedsowelltheartofstatistics.…Hewasalwaysseekingnewmethods–newwaysofmanipulatingfigures-newchartforms.…Hewasneverlost,however,inhisstatistical

techniquesnorwasheoverlyimpressedbythem.Hemadethemtoolstosqueezethemeaningoutofthedata.Hewillberememberedasamasterofthepresentationofstatistics.Buthismasterywasbasedonpatientanalysisandreflectionwhichreducedproblemstotheirsimplestelements.(Burgess,1947)

A.TheBusinessBulletin

In1920,AyresbeganworkingattheClevelandTrustCompany(establishedin1894;showninFigure3)wherehewasavicepresident,economist,andmemberoftheexecutivecommittee.For25years,heeditedandalmostentirelywrotethetrustcompany’sBusinessBulletinwhichbecameahighlyregardedfour-pagepublicationreleasedonthe15thofeverymonth.Today,KeyCorpisthesuccessortotheClevelandTrustCompany.

Figure3–TheClevelandTrustCompany

In1920and1921,theBulletincoveredtheautomobile,pigiron,andcoalindustriesaswellasbuildingconstruction,employment,andagriculture.Thereafter,Ayresbegananalyzinginterestrates,bondyields,dividendstocks,andbusinesscycles(asubjectinwhichhisworkhasbeeninfluential).Stockmarketmovementsandvolumebegangarneringattention.ThebullmarketthathadbeguninAugust1921likelypromptedtheincreasinganalysisofstockmarketstatistics.

InNovember1922,theBulletinreportedthenumberofstocks,outofthe678issuestradedontheNewYorkStockExchange(“NYSE”)thathadreachedtheirhighestandlowestpricesineachmonthofthatyearthroughOctober.Ayresconcludedthatwhilestockpricestendtomoveinonedirection,allstocksdonotmovetogether.Thestockmarketisselectiveasthemarketaveragesandsomestockpricesdivergeintrend.

InJanuary1924,hewrotethatwhilethestockmarketin1923hadrisenrapidlyuntilMarch,fallentoJuly,recoveredtoSeptember,fallentoNovember,andthenrisenuntiltheendoftheyear“manyindividualstocksdidnotfollowthisgeneraltrend.”(BusinessBulletin,Jan.15,1924)Figure4recreatesthetablepublishedintheBulletin.Figure4showsthatamongthe629NYSEissuestabulated,203reachedtheirhighestpricesinthefirstquarterandtheirlowestpricesinthefourthquarter.Inthefourthquarter,26stocksmadetheirhighsandalsotheirlowsfortheyear.

Figure4–StocksMakingTheirHighsandLows,Quarterly,1923

B.TheAdvance-DeclineLine

Fromstudyinghighsandlows,itisashortsteptotabulatingadvancesanddeclinestoseeifthedivergenceofmarketaveragesandstockpricesisclearer.InJanuary1926,AyresshowedHughesthefirst“countofthemarket.”Ayres’commentspublishedinSeptember1926,showthatbothmenhadbeentabulatingthedailyadvancing,declining,andunchangedstocks:OnthefirstofSeptemberthestockmarkethadbeenopenfortradinginsecurities200daysthisyear.On105ofthesedaysamajorityofthestocksthatweredealtin,andhadanynetchangeinmarketquotation,advancedinprice;ontheremaining95daysamajorityofthemdeclined.Neitherthedaysofadvancenorthoseofdeclinecameinlongconsecutivesequences.(BusinessBulletin,Sept.15,1924)

TheBulletindoesnotindicatewhyAyresandHugheswerestudyingthesestatistics.In1951,Hughesexplainedthatthe“primarypurposewastodiscoveratechnicalmethodthatwouldtimemoreaccuratelymajorturningpointsinthestockmarketaftervariousfundamentalrelationshipshadindicatedthataturninthemajortrendwasavirtualcertaintywithinafewmonths.”(Hughes,1951)Ayreswasinterestedintimingmajorturningpoints.

Ayresstudiedeconomicrelationshipsinbusinessactivity.Hefoundthattherelationshipscanshowthatamajorturningpointinthestockmarketisahead,butcannottimewhenthereversalwilloccur.AccordingtoHughes(1951):Afterayearorsooftryingtocombinevariouseconomicseriessothattheywouldexactlyindicatemonthsofmajorhighsandlowsinthestockmarket,GeneralAyresreluctantlyconcededthatthiswasexpectingtoomuch.Hefinallydecidedthateconomicrelationshipswereofprimaryimportanceinindicatingtheprobabilitythatthemarketwasapproachingamajorturningpointbutthatitwasmorelogicaltousetechnicalevidencebasedontheactionofthemarketitselftotimemorecloselyactualreversalsinmajortrendsofstockprices.

Currentinterestrates,whichAyresconsideredtobe“thedominantfactorin

determiningthecourseofstock[andbond]prices,”wereincludedintheanalysis,butalthoughextremelyhelpful,therateswerenotfullysatisfactoryfortimingmajorturningpoints.(Hughes,1951).

AyresandHughesconsideredseveralpopulartechnicalmethods,butthosetoldthataturningpointhadoccurred.AccordingtoHughes,“whatwewantedwassomethingthattoldusaturningpointwasimminentatatimewhenourfundamentalrelationshipstoldusthatitwasgoingtobeamajorturningpoint.”(Hughes,1951)Theseweretheobjectivesthatpromptedstudyingthedailyadvances,declines,andunchangedstatistics.

InthechartpublishedinSeptember1927,AyresandHughesobservedthatthethreelinesshowedatendencytowardasimilardirectionofmovement,buttheagreementwasnotclose.Theyconcludedthat“itdoesnotappearthatthereexistsasufficientlycloseagreementtobeofmuchuseinjudgingtheprobablefuturecourseofthemarket.”(BusinessBulletin,Sept.15,1924)Itisunknownifthisconclusionpausedtheirfurtherstudiesofthecountofthemarket.

ItdoesnotappearthattheBulletin,atleastthrough1937,publishedasubsequentchartofanadvance-declineindicator.In1938,theCowlesCommissioncompiledalistofallstockmarketindexespublishedfrom1871through1937.TheCommissionreportedthattheClevelandTrustCompanyhadinSeptember1927,publishedanindexof“Daily,Jan.-Aug.,1927,allissuestradedon[the]NewYorkStockExchange,excessofnumberofstocksadvancingoverthosedeclining.”(Cowles,1938)NoothersimilarindexespublishedbytheClevelandTrustCompanyweredescribed.ThisabsenceindicatesthattheBusinessBulletinthrough1937didnotpublishfurtherchartsofanadvance-declineindicator.

However,inOctober1929,theBulletinpublishedachartthatmaybethefirstdescriptionofacumulationofadvancesanddeclines.ThechartshowsthepercentageofstockstradedontheNYSEthatsoldhigherorlowerattheendthanatthebeginningofthemonth.Thechartshowsthatin“fiveoftheninemonthstheadvancingstockissueshavebeenmorenumerousthanthedecliningones,whileintheremainingfourmonthsofFebruary,March,May,andSeptemberthedecliningissueshaveoutnumberedtheadvancingones,”and“despitethefactthatmoreissueshaveadvancedthanhavedeclinedinamajorityofthemonthsthetotalofallthepercentagesofadvanceis333,whilethesumofthedeclinesis434.”(BusinessBulletin,Oct.15,1929)

Thechart’sinformationisredesignedandrecreatedinFigure5asfollows.

Figure5–PercentofStocksTradedthatMovedUporDownEachMonthJanuarytoSeptember1929

Addingthepercentagesofadvancesanddeclinesrevealedadeteriorationthattheindividualpercentagesdidnotshow.Duringmostof1929a“creepingbearmarket”hadbeenhiddenbycertainstocksadvancingsomuchtheycarriedthestockmarketaveragesuptonewlevelspriortotheOctoberCrash.Inspiteofnewhighrecordsforvolumeandthemarketaverages(theDowIndustrialsclosedatitsthenhighestof381.17onSeptember3,1929),abearmarkethadbeeninprogress.

IhavenotfounddocumentsshowingthatinthoseearlyyearsAyresandHugheseithercumulatedadvancesanddeclinesorusedratios.Theearliestreferencetoacumulativeadvance-declinelineIhavefoundis1948.(Mindell,1948)RatioscamelaterasaresultofHughes’innovation.Theyuseddailydata.TheiranalysiscoveredthebroadmarkettradedontheNYSE.

C.CharlesH.Dow(1851-1902)

DowTheoryscholarlateProfessorGeorgeW.Bishop,Jr.notedthatCharlesH.DowpennedaWallStreetJournaleditorialonJanuary23,1900,inwhichDowobserved,“Takelastweekforinstance:Thereweredealingsin174stocks.…Ofthese174stocks,107advanced,47declined,and20stoodstill.”(Bishop,1964)

BishopdidnotgiveanyotherreferenceDowmadetoadvances,declines,andunchanged.BishopwasnotingthatDowdiscussedstockmarket“techniquescreditedtoothersatamuchlaterdate.”Hecautionedthatbyquotingfromthis

editorial“wedonotmeantoimplythatGeneralAyresdidnotarriveatthe‘countofthemarket’independently.”(Bishop,1964)

MyopinionisDowmadeacommenter’sobservationbutcannotbecreditedwithoriginatingtheadvanceanddeclineindicators.

III.JamesF.Hughes

LittleisknownabouttheearlyyearsofJamesF.Hughes,Ayres’creativeanddiligentassistantwhoachievedhisownfame.AccordingtofinancialanalystA.HamiltonBolton,writingin1960,Hugheswasoneofthemarkettechnicianswho“leftanindeliblemarkonWallStreetinthepresentgeneration.”(Prechter,1994)

In1923,HughesbecameAyres’sassistantattheClevelandTrustCompany.By1930,hewaswiththeWallStreetfirmofOtis&Company.ByApril1934,hewasananalystforCharlesD.BarneyandCompanywhichlaterbecameSmithBarney&Company.ItappearsHughesremainedthereuntilMarch1946,whenTheNewYorkTimesannouncedthatHugheswasamarketanalystandeconomistwithAuchincloss,Parker&Redpath.(FinancialNotes,1946)

In1940-41,HughesservedasVicePresidentoftheNewYorkSocietyofSecurityAnalysts.HewroteatleastthreearticlesforTheAnalystsJournal,predecessoroftheFinancialAnalystsJournal.HughescitedAyres’sresearchinthethreearticles.BetweenJanuary15,1950,andJune15,1953,Hugheswrotethe“StockMarketOutlook”columnforForbesmagazine.

A.AmericanStatisticalAssociation

TheAmericanStatisticalAssociation(“ASA”)istheprofessionalorganizationforstatisticiansandrelatedprofessionals.ASAisthesecondoldestprofessionalgroupintheUnitedStateshavingbeenfoundedinBostonin1839.FlorenceNightingale,AlexanderGrahamBell,andAndrewCarnegieweremembers.

AyresandHughessharedaconnectiontotheASA.AyresservedastheASA’s21stPresident.Hugheswasamemberatleastfrom1930to1936,andhespokeatseveralofthefamedASAdinnermeetingsheldinNewYorkCity.Themeetingswerehighlyregardededucationaleventspresentingtheleadingbusinessandfinancialpeople.

Hughesspokeatthefollowingmeetings:

May9,1929

April24,1934-TheothertwospeakerswereHaroldM.GartleyandRobertW.Schabacker.ThesummaryshowsHughesstatedthat“thebestmethodofforecasting[stockmarket]movementsistouseindicationsfromthemarketitself.”(AmericanStatisticalAssociation,1934)

January26,1937-TwooftheotherspeakerswereGartleyandCharlesJ.CollinsofElliott

Wavefame.Fivehundredpeopleattended.

December30,1949.

Figure6–TheGiantsofTechnicalAnalysisatWork

B.TheAdvance-DeclineRatio

HughesdevelopedtheAdvance-DeclineRatiowhichisthedifferencebetweenadvancesanddeclinesdividedbytotalissuestraded.AfterseeingAyres’countofthemarketinJanuary1926,Hugheswrotethat“oneofthefirstthingsIthoughtaboutthisnew‘statistic’wasthatthetotalnumberofissuestradedwouldprovideanexactmeasurementeachdayofthebreadthoftradingontheNYSE.”(Hughes,1951)ThenumberofdailytotalissuestradedisthedenominatorofHughes’sindicator.

Hughes’snon-cumulativeadvance-declineratiohaditsbeginningsinwhatHughestermedthe“Climax-BreadthMethodofRecognizingMarketTurningPoints.”Hisinterestintemporarysellingclimaxes,spurredbytheFebruary-March1926stockmarketbreak,ledtohissearchforanindicatorthatcouldtimeasellingclimax.Hugheswasdoingthisresearchpriorto1948.

Asellingclimaxisaburstofliquidationwheninvestorsfranticallyselltheirholdings.Hughesnotedthatasellingclimaxwastheresultofanabnormallylargeconcentrationofdeclinesinstocksforseveraldayspriortoasharprebound.Thequestionbecamewhat“technicaldevelopments”couldbeconsideredtobeabnormalintheactionofabreadthindexorintherelationofbreadthtoamarketpriceindex.Hughes(1951)observedthat:Afterseveralyearsitbecameobviousthatoneimportantabnormaldevelopmentwasthefailureofthebreadthindexandtheindustrialaveragetokeepinclosealignment.Fundamentallytheyhadsomuchincommonthatitwashighlyabnormalforthemtoshowanyprotracteddivergenceintrend.

Hughesnotedthattheabnormalityofanimportantdivergencebetweenbreadthandpriceresultedinareversalofthemarkettrendthathadproducedthedivergence.Ayreshadobservedthatinaselectivestockmarket,theprevailingcurrentofpricesdidnotcarryallstocks;somediverged.Hughesconcludedthatanimportantdivergencebetweenbreadthandpricewasabnormalandledtoamajortrendreversal.

Ina1959interviewwithBurtonCrane,aleadingfinancialwriterforTheNewYorkTimes,Hughesexplainedwhyanimportantdivergencebetweenthebreadthindexandthemarketaverageswarnsofareversal.(Crane,1959)TherearemanystocksontheNYSEwhosepricesareinfluencedbyinterestrates.Asratesrise,thesestockstendtofallwhilethemorevolatilegrowthstocksthatpopulatemarketaveragescontinuetosoar.Atrendreversalcorrectsthisabnormality.

WhileatAuchincloss,Parker&Redpath,HugheseditedamarketletterbasedontheAdvance-DeclineRatio.Hughescautionedthattheseconceptsarenoteasytograsp.Referringtotheclimax-breadthmethod,hewrote,“Knowingthatittookmefrom1926to1949toacquireconfidenceinthistechnicalmethod,Iamnotamazedthatpeopledonotunderstanditatfirstsight.”(Hughes,1952)

IV.RichardRussell

In1977,notedDowTheoryexponentRichardRussellwrotethat:TheAdvance-DeclineRatiowasconceivedbyJamesHughesofNYCworkingjointlywithColonelLeonardAyresoftheClevelandTrustCo.Theydidmuchoftheiroriginalworkbackinthe1920’sandbefore.Duringthe1950’sand60’sHugheswroteamarketletter(basedonA-DRatioaction)atAuchincloss,Parker,Redpath.Iusedtoreadthisreportreligiously,andonoccasionIwouldtalktoHughesaboutsomepointorotherthatIdidnotunderstand.AsIgottoknow

moreabouttheA-DRatio(withHughes’help),IintroduceditinDowTheoryLetters.

Itseemshardtobelievenow,butintheearly1960’stheA-DRatiowasrelativelyunknownonWallStreet.Intheintroductiontothechartbooks,ItermedtheA-DRatio‘thesinglemostvaluableaidtotechnicalanalysis,’after(ofcourse)theAveragesthemselves.Istillholdthatopinion.

AstheA-DRatiobecamemorefamiliartoWallStreeters,variationsandsundrysophisticatedformulaswereintroduced.Someofthesewereexcellent,mostwerenot.HugheshimselfinsistedthatonlythedailyA-Dlinewassignificant,andhehadlittleuseforthecombinedweeklyandevenmonthlyA-DRatiocomputations.Itendtoagreewithhim.…

HughesalwaysusedtheA-DRatioinconjunctionwiththeDowIndustrialAverage,observingwhetherthemovementsofthetwowereprogressinginharmonyorwhetherdivergenceswereoccurring.HistorydemonstratesthattheDowandtheA-Dtendtomoveinharmony,andwheredivergences(dis-harmonyoccurs),themarketwillusuallyerasetheentiremovementwhichcausedthedis-harmony.”(Russell,1977;Emphasesinoriginal)

Russellhadbeenstudyingtherelationship-“acriticalone”-betweentheDowIndustrials(“DJIA”)andtheAdvance-DeclineRatioforovertwentyyearsbyhimselfand“withthehelpofJamesHughes.”AccordingtoRussell,it“wasHugheswhofirstcalledmyattentiontothefactthatextendedperiodsinwhichtheDowmakesnewhighs,unconfirmedbynewhighsintheA-Dratio,leadtotrouble.Thisisnotalwaystrue,butitistrueinthegreatmajorityofcases.”(Russell,1976;Emphasisinoriginal.)

Sincethemid-1960s,RussellhaspublishedachartbookoftheDJIAandAdvance-DeclineRatiowhichareshownbackto1931.Hewanted“toprovidemarketstudentswithanoverallviewandfeelforthisvaluableindicator.”(Russell,1977)

V.Conclusion

RusselltooktheworkofAyresandHughestothefrontstage.Russellistheclosingactorinthiswonderfulstory.

LeonardP.AyresandJamesF.HughesoriginatedtheAdvance-DeclineLineandpublisheditsfirstchartinSeptember1927.Ayreshadnotedthatthestockmarketisselectiveasmarketaveragescantrendinonedirectionwhilethe

movementofsomestockswilldiverge.Notallstocksmovetogether.

Thisobservationledtotheinnovationthatatechnicalindicatorbasedonadvances,declines,andunchangedcouldmoreaccuratelytimemajorturningpoints.Economicrelationshipsinbusinessactivitiescantellusareversalisahead,buttheAdvance-DeclineLinecantelluswhenthereversalwilloccur.

Forthenextthreedecades,Hughescontinuouslyappliedandexpandedtheuseofadvances,declines,andunchangedwhiledevelopingtheAdvance-DeclineRatio.Hughesbelievedthatabreadthandpriceindexhavesomuchincommonthatitishighlyabnormalforthemtoshowaprotracteddivergenceintrend.Animportantdivergencebetweenbreadthandpriceresultsinareversalofthemarkettrendthatcreatedtheabnormaldivergence.

ThesearetheconceptsunderpinningtheAdvance-DeclineLineandAdvance-DeclineRatiothatAyresandHughesoriginated.Derivedfromstatisticsofmarketaction,withtheirlogicgroundedonobservationsofmarketbehavior,theseindicatorscontinuetoexcel.

References

AmericanStatisticalAssociation,1934,TechnicalMethodsofForecastingStockPrices,Journalofthe

AmericanStatisticalAssociation,vol.29,187:325.

Bishop,Jr.,GeorgeW.,1964,WhoWastheFirstAmericanFinancialAnalyst?,FinancialAnalystsJournal,vol.20,2:28.Dow’seditorialwaspublishedinTheWallStreetJournal,Jan.23,1900,vol.11,16:1.

Burgess,W.Randolph,1947,LeonardP.Ayres:AnAppreciation,JournaloftheAmericanStatistical

Association,vol.42,237:128.

BusinessBulletin,Jan.15,1924.ClevelandTrustCo.

BusinessBulletin,Sept.15,1924.ClevelandTrustCo.

BusinessBulletin,Sept.15,1927.ClevelandTrustCo.

BusinessBulletin,Oct.15,1929.ClevelandTrustCo.

Colby,RobertW.,2003,TheEncyclopediaofTechnicalMarketIndicators

SecondEdition.NewYork:McGraw-Hill.

Cowles3rd,AlfredandAssociates,1938,Common-StockIndexes,1871-1937.Bloomington,IN:PrincipiaPress,Inc.,p.439.

Crane,Burton,StockIndicatorShowsNoDanger,TheNewYorkTimesdigitalarchives,Mar.15,1959.

Dickson,RichardA.andTracyL.Knudsen,2012,MasteringMarketTiming.SaddleRiver,NJ:FTPress.

FinancialNotes,TheNewYorkTimesdigitalarchives,Mar.14,1946.

Gartley,HaroldM.,1935(1sted.)repub.1981,ProfitsintheStockMarket.Pomeroy,WA:Lambert-GannPub.Co.

Hughes,JamesF.,1951,TheBirthoftheClimax-BreadthMethod,TheAnalystsJournal(todayFinancialAnalystsJournal),vol.7,3(3rdQtr).

Hughes,JamesF.,Mar.1,1952,StockMarketOutlook,ForbesMagazine,p.34.

LeonardAyres,67,Economist,isDead,TheNewYorkTimesdigitalarchives,Oct.30,1946.

Mindell,Joseph,1948,TheStockMarketBasicGuideforInvestors.NewYork:B.C.Forbes&SonsPub.Co.

Morris,GregoryL.,2006,TheCompleteGuidetoMarketBreadthIndicators.NewYork:McGraw-Hill.

Prechter,Jr.,RobertR.ed.,1994,TheCompleteElliottWaveWritingsofA.HamiltonBolton.GA:NewClassicsLibrary,p.117.

Russell,Richard,DowTheoryLetters,Letter668,June30,1976,p.2.

Russell,Richard,DowTheoryLetters,Letter686,Jan.14,1977,p.2.IhavenotfounddocumentsshowingthatAyresorHughesworkedonmarketbreadthbefore1920,butitisimprobable.

TheEncyclopediaofClevelandHistory.http://ech.cwru.edu(visitedonNov.6,2011).

www.arlingtoncemetery.net(visitedonNov.6,2011).

GeorgeA.Schade,Jr.,CMT,hasextensivelyresearchedthehistoryoftechnicalindicatorsandwrittenabouttheiroriginsanddevelopment.Hehassoughttoanswerlongstandingquestionsofattributionandcontinuity.Beforehisretirement,hewasatrialcourtjudicialofficer.

TheBreadthDanceHereisanattempt(possiblylame)tohelpyouunderstandthelongertermbullishandbearishmovesinthemarketandhowthevariousbreadthcomponentsplaytheirpart.Andyes,Idonotdancewell.

Thebigdanceisabouttobegin(bullishupmove).Someofthosethatshoweduparetheadvances,thedeclines,theunchanged,thenewhighs,newlows,andtheeverpresentvolumetwins(upanddown).Thedancepartnersarealwaysthevolumepair.Asthemusicbeginstoplaythereareonlyafewdancersonthefloor–mainlytheadvancesandprimarilywiththeupvolume.Thenumberofdancersisgoodbutmoreshowupastheeveningcontinues.Astheeveninggetsunderwaymoreandmoreadvancesstarttodance,andalmostalwayswiththeupvolume.Thedeclines,kindofanerdygroup,onlydanceatcertaintimes,usuallyonlywhenitisanunpopularsong(shortcorrections).

Astheeveningmoveson,afewofthenewhighsstarttodance.Theydidnotdanceearlierbecausetherehavenotbeentoomanydancesoflate.Theusualsmallgroupoftheunchangedaredancingbutmostarewithoutdatesandjustwatchfromtheside.Asthenightcontinuestheadvances,whohavebeendancingmostofthenight,begintositoutadancehereandthere.Theyarewornout.Becauseofthat,theunchangedarestartingtodancemorewhilethedeclinesstillarenotdoingmuchdancing.

Withthebeginningofthelastmusicset(toppingactioninthemarket),thesoundishigh,everyoneisatthedance.Theadvanceshavebeentotallywornoutandonlydancenowandthenwhenareallypopularsongisplayed(shortupmoves).Theunchangedaredoingalotofdancingeventhoughtherejustaren’tthatmanyofthem,andthedeclines,realizingthenightiscomingtoanend,begintodancemore.Infact,asthelastfewsongsareplayed,thedeclinesgetasecondwindandaredoingmostofthedancing.Mostoftheadvanceshavegonehomewiththenewhighs.Thenewlowsarestillonthesidelines,butsomeofthedeclinesaretakingasecondlookatthem.Asthelastcoupleofsongsareplayed,theonlyonesdancingarethedeclinesandthenewlows,bothofwhomaredancingwiththedownvolume;infact,someoftheunchangedarealsodancingwiththenewlows.Themusicstopsandthedanceisover.Onthewayhome(establisheddownmove)thedeclinesdomostofthedriving,initiallybythemselves,thenmoreandmorewiththedownvolumes,andastheygetcloser

tohome(marketbottom),thedeclinesareaccompaniedbythenewlows.Astheyallapproachhome,thedeclinesandthedownvolumearealmosttheonlyoneswhoarenotthereyet.Theytalkaboutthenextdance.

Thethreechartsbelowshowtheperiodfromearly1982tothesummerof1984.Thiswasaperiodwhereabearishmarketwasfollowedbythebeginningofabigbullmarket(August,1982),andthenbyaslowrollingtopformationintomid-1984.Youcanfollowalongwiththebreadthdanceandverifytheinformationonthenextthreecharts.Therawbreadthdataisthelighterofthetwolines.Thedarkerlineisa10-dayexponentialaverageoftherawdata.Chart1-1showstheadvances,declines,andunchanged,allasapercentageofthetotalissues.

Chart1-1

Chart1-2showsthenewhighsandnewlowsasapercentageoftotalissues.

Chart1-2

Chart1-3showstheupvolumeandthedownvolumeasapercentageoftotalvolume.

Chart1-3

References:

Bramly,Serge.Leonardo,theArtistandtheMan.NewYork:PenguinBooks,1994.

“Understandingbreadthgivesmarketinsightthatcan’tbeobtainedanyotherway.Breadthworks.Youneedtounderstanditanduseit.Fromthemanyinthisbookchooseafewindicatorsthatareinsyncwithyourportfolioobjectivesandenjoyalastingrelationshipwiththemastheyhelpyouthroughthemarket’smanyupsanddowns.”

ShermanMcClellan

Publisher,McClellanFinancialPublications,Inc.

CH 2 - NECESSARY BREADTHINFORMATIONInthischapteralotofbasicinformationwillbeprovidedtoassistyouinunderstandingtheremainderofthisbook.Therearedefinitions,mathematicalformulae,explanationsofanomalies,indicatorformulae,historicaleventsthataffectthedata,differingmethodsofcalculation,andahostofotherimportantinformationnormallyfoundinanappendix.Itisofsuchimportancetounderstandthismaterialthatitbelongspriortothediscussionofbreadthindicators.

BreadthComponentsBreadthcomponentsarereadilyavailablefromnewspapers,onlinesources,etc.andconsistofdailyandweeklystatistics.Theyare:Advances,Declines,Unchanged,TotalIssues,UpVolume,DownVolume,TotalVolume(V),NewHighs,andNewLows.

Fromonedaytothenext,anyissuecanadvanceinprice,declineinprice,orremainunchanged.Alsoanyissuecanmakeanewhighoranewlow.Herearemorespecificdefinitions:

AdvancingIssuesorAdvances(A)–Stocksthathaveincreasedinpricefromonedaytothenext,evenifonlybyonecent,areconsideredasadvancingissuesoradvances.

DecliningIssuesorDeclines(D)–Stocksthathavedecreasedinpricefromonedaytothenextareconsidereddecliningissuesordeclines.

UnchangedIssuesorUnchanged(U)–Stocksthatdonotchangeinpricefromonedaytothenextareconsideredunchangedissuesorunchanged.

Note:PriortoJuly,1997,stockpricesweremeasuredineighthsofapoint,orabout12.5centsastheminimumtradingunit.InJuly,1997theNYSEwentfromusingeighthstosixteenths.Thismadetheminimumtradingunitabout6.25cents.OnJanuary2,2002theywenttoadecimalizationpricingthatmadetheminimumtradingpriceequaltoonecent(apenny).Thisisdealtwithinmoredetailintheunchangedissuessection.

TotalIssues(TI)–Thisisthetotalofallissuesavailablefortradingonaparticularexchange.Ifyouaddedtheadvances,declines,andunchangedissuestogetheritwouldequalthetotalissues.

AdvancingVolumeorUpVolume(UV)–Thisisthevolumetradedonadayforeachofthestocksthatareadvancingissues.Itisthetotalvolumeofalltheadvances.

DecliningVolumeorDownVolume(DV)–Thisisthetotalvolumeforallthedeclinesforaparticularday.

TotalVolume(V)–Thisisthetotalvolumeofalltradingforaparticularday.

TotalvolumeisthesumofUpVolume,DownVolume,andUnchangedVolume.TofindUnchangedVolumesubtractthesumofUpVolumeandDownVolumefromtheTotalVolume.Totalvolumeisnotgenerallyconsideredabreadthcomponent,butismanytimesusedinaratiowiththeupordownvolumetoalleviatetheincreaseintradingactivityoverlongperiodsoftime.

NewHigh(H)–Wheneverastock’spricereachesanewhighpriceforthelast52weeksitistermedanewhigh.

NewLow(L)–Wheneverastock’spricereachesanewlowpriceforthelast52weeksitistermedanewlow.

Note:TheNYSEnewhighsandnewlowsarenowcomputedonafixed52weekmovingtimewindowstartingonJanuary1,1978.Beforethat,thenewhighsandnewlowswerecomputedonavariabletimewindowofanywherefromtwoandahalfmonthsto14andahalfmonths.Thisrenderedthenewhighnewlowdatapriorto1978almostuseless,andcertainlyconfusingtouse.

BreadthversusPriceBreadthdoesnotconsidertheamountormagnitudeofpricechange.Italsodoesnotconsiderthenumberofsharestraded(volume).Anditdoesnotconsiderthesharesoutstandingforindividualstocks.Moststockmarketindices,suchastheNewYorkStockExchangeCompositeIndex,theNasdaqCompositeIndex,S&P500Index,theNasdaq100,etc.weigheachstockbaseduponitspriceandnumberofoutstandingshares.Thismakestheircontributiontotheindexbasedupontheirvalueandaresometimescalledmarket-valueweightedindicesorcapitalizationweightedindices.Becauseofthis(atthiswriting),Microsoft,Qualcomm,Intel,Cisco,eBay,Nextel,Dell,Amgen,Comcast,andOracleaccountforover40%oftheNasdaq100IndexanditsETF,QQQQ.Tenpercentofthecomponentsaccountfor40%ofthepricemovementoftheindex.Thiscanleadtoanincorrectanalysisofthemarkets,especiallyifsomeoftheselargecapstocksexperiencepricemovingevents.Manytimesthereferencetothelargecapsissuesisthatofthegenerals,whilethesmallcapsarereferredtoasthesoldiers.Asyouwillfindout,thegeneralsarenotalwaystheleaders.

Breadthtreatseachstockthesame.AnadvanceofonecentinMicrosoftisequallyrepresentedinbreadthanalysisastheadvanceofthirtycentsofthesmallest,leastcapitalizedstock.Breadthistrulythebestwaytoaccuratelymeasuretheliquidityofthemarket.

TheDifferencebetweenDailyandWeeklyBreadthData.Youjustcannotaddupdailybreadthdatafortheweektogettheweeklydata.Hereisascenariothatwillexplainwhy.

Here’sthenarrative:AnadvanceordeclinefortheweekshouldbebaseduponitspricechangefromthepreviousFridayclosetothecloseofthecurrentweek.Ithasabsolutelynothingtodowiththedailydata.Takeasinglestock;itspreviousFridayclosepricewas$12.00.OnMondayitwasup$1.00to$13.00.ItwentupadollareachdayforthefirstfourdaysoftheweekandclosedonThursdayat$16.00.However,onFridayitdropped$5.00to$11.00.Fortheweekitwasdown$1.00,whichwouldbeonedeclinefortheweek.However,onadailybasis,itaccountedforfouradvancesandonedecline,oranetthreeadvances.

JohnMcGinley,pasteditorofTechnicalTrends,andsidekickofArthurMerrill’s,sentthisnote:“Istronglybelievethatincreatingweeklyfiguresfortheadvancedeclines,onedoesnotusethepublishedweeklydatafortheydisguiseandhidewhatreallywentonduringtheweek.Forinstance,imagineaweekwith1500netadvancesonedayandtheotherfourdayseven.Theweeklydatawouldhidethedevastationwhichoccurredthatdramaticday.”

AdvantagesandDisadvantagesofusingBreadthBreadthdataseemstonotbeconsistentamongthedataproviders.Ifyouthinkaboutit,ifastockisupitisanadvancefortheday,sowhyisthereadisparity?Somedataserviceswillnotincludeallstocksontheexchange.Theywilleliminatepreferredissues,warrants,rights,etc.Thisisfineaslongastheytellyouthatiswhattheyaredoing.

Inthelastfewyears,thenumberofinterestsensitiveissuesontheNewYorkStockExchangehasincreasedsothattheyaccountformorethanhalfofalltheissues.Theseissuesarepreferredstocks,closed-endbondfunds,electricutilitystocks,tomentionafew.

ManyanalystssuchasShermanandTomMcClellan,CarlSwenlin,andLarryMcMillanusecommonstocksonlybreadthindicators.RichardRussellreferstoitasanoperatingcompanyonlyindex.Usingstocksthathavelistedoptionsavailableisanothergoodwaytoavoidtheinterestsensitiveissues,sincemoststocksthathavelistedoptionsarecommonstocks.

IndicatorsandTerminologyYouShouldBeFamiliarWithTherearebasicallyfourdifferentindicatortypes:differences,ratios,percentage,andcumulative.Differencesaremostcommonandshouldbeadjustedfortimeindependentscaling.Asthenumberofissuesincreaseovertime,thescalingwillgetexpandedandthresholdsthatworkedinthepastwillneedtobeadjusted.Onewaytodothisistonormalizetheindicatorsothescalingisalwaysbetweenzeroandonehundred.

AbsoluteValue–Inmathematicalscriptthisisdenotedwith||aroundthevalueinwhichyouwanttohaveitsabsolutevalue.Absolutevaluecalculationsignorethesign(positiveornegative)ofthenumber.Inregardtobreadthdata,absolutevalueignoresmarketdirectionandonlydealswithmarketactivity.Theabsolutevalueof+3is3,andtheabsolutevalueof-3isalso3.

Accumulated/Summed(∑)(alsoseecumulativebelow)-Thisisthetermusedtoaddupaseriesofnumbers.Forexample,theadvancedeclinelineisanaccumulationofthedifferencebetweentheadvancesandthedeclines.Thatdifferenceissummedwitheachnewday’sdifferenceaddedtothepreviousvalue.Alsousedwiththetermcumulate.InmanyformulaeinthisbookitisshowneitherasPreviousValue+Today’sValueor∑.

Arithmetic/SimpleMovingAverages–Totakeanaverageofjustaboutanythingnumerical,youaddupthenumbersanddividebythenumberofitems.Forexample,ifyouhave4+6+2,thesumis12,andtheaverageis123=4.Amovingaveragedoesexactlythisbutasanewnumberisadded,theoldestnumberisremoved.Intheexampleabove,let’ssaythat8wasthenewnumber,sothesequencewouldbe6+2+8.Thefirst4wasremovedbecauseweareaveragingonly3numbers(3periodmovingaverage).Inthiscasethenewaveragewouldbe163=5.33.Sobyaddingan8andremovinga4,weincreasedtheaverageby1.33inthisexample.Forthosesoinclined:8–4=4,and4/3=1.33.

Intechnicalanalysisthesimpleorarithmeticaverageisusedextensively.Onethingthatyoushouldkeepinmind,isthatwiththesimpleaverageeachcomponentisweightedexactlythesame.Thistendstomakethesimpleaveragestaleifusingitforlargeamountsofdata.Forexample,thepopular200-day

averagemeansthattheprice200daysagoiscarryingthesameweight,orhavingthesameeffectontheaverageasthemostrecentprice.It,therefore,isalsomuchslowertochangedirection.

Cumulative-Cumulativeindicatorscanbedifferences,ratios,orpercentage.Youareaddingthedailyresultstotheprevioustotal.Theadvancedeclinelineisagoodexampleofacumulativeindicator.Itissometimesreferredtoasaccumulateorsummed.

Detrend–atermtodenotewhenyousubtractthepricefromamovingaverageoftheprice.Thiswillamplifythepricerelativetoitssmoothedvalue(movingaverage).Tovisualizethis,pretendyouhadtheabilitytotakebothendsofthemovingaveragelineandpullittautsothatthepricelinefallsintoitssamerelativepositiontothenowstraightmovingaverageline.Doingthisallowsyoutoseecyclesofalengthgreaterthanthatofthenumberofperiodsusedinthemovingaverage.

Divergence–thisiswhenanindicatorandpricedonotconfirmeachother.Atmarkettops,manytimesthepricewillcontinuetomakenewhighs,whileanindicatorwillreverseandnotmakeanewhigh.Thisisanegativedivergence.

ExponentialMovingAverages–Thismethodofaveragingwasdevelopedbyscientists,suchasPeteHaurlan,inanattempttoassistandimprovethetrackingofmissileguidancesystems.Moreweightisgiventothemostrecentdataanditisthereforemuchfastertochangedirection.Itissometimesrepresentedasapercentage(trend%)insteadofbythemorefamiliarperiods.Hereisaformulathatwillhelpyouconvertbetweenthetwo:

K=2/(N+1)whereK=thesmoothingconstant(trend%)andN=periods.AlgebraicallysolvingforN:N=(2/K)–1.

Forexample,ifyouwantedtoknowthesmoothingconstantofa19periodexponentialaverage,youcoulddothemath,K=2/(19+1)=2/20=0.10(smoothingconstant)or10%(trend)asitismanytimesexpressed.

Hereissomethingveryimportantinregardtoexponentialmovingaverages;bythenatureoftheirformulatheywillalwayschangedirectionwhentheymovethroughthepricethatisusedtocalculatethem.Thismeansthatduringanuptrendinpricesandtheirexponentialaverage,whenthepricesdropbelowtheaverage,theaveragewillimmediatelybegintodecline.Asimpleorarithmeticaveragewillnotdothis.

Momentum–seeRateofChange.

Normalize–Thisisamathematicalproceduretoreducethescalingofunlikedatasoitcanbemoreeasilycompared.Tonormalizeaseriesofdataoneusuallywantstheresultantdatatofallinarangefromzerotoonehundred.Theeasiestwaytodothisisbythefollowingformula:

(CurrentValue–LowestValueintheSeries)

-----------------------------------------------------------

(HighestValueintheSeries-LowestValueintheSeries)*100.

SomeofyoumightnoticethatthisissimilartotheformulaforGeorgeLane’s%KStochasticindicator,withtheexceptionthatforstochastics,thehighestandlowestvaluesaresetbythenumberofperiodsyouwanttouse.Manyindicatorsareservedwellbylookingattheirnormalizedvaluesforapredeterminednumberofperiods.Forexample,iftherewasagoodidentifiablecycleinthemarketbeinganalyzed,thenumberofperiodsofthatcyclelengthmightbeagoodnumbertousefornormalization.Anumberofthebreadthindicatorsinthisbookarenormalizedinthatmanner.

Oscillator–Atermusedtoexplainanumberoftechnicalindicatorssuchasrateofchange,momentum,stochastics,RSI,etc.Theseareallindicatorsthatoscillateaboveandbelowacommonvalue,manytimeswhichiszero.Othertimestheyoscillatebetweenzeroandonehundred.

Overbought/Oversold–Thesetermshavegottobethemostover-usedtermswhentalkingaboutthemarkets.Overboughtreferstothetimeinwhichthepriceshaverisentoalevelthatseemsasiftheycannotgoanyhigher.Oversoldistheopposite,priceshavedroppedtoapointitseemsastheycannotgoanylower.Whilethissoundssimpleenough,thetermisusuallybaseduponsomeone’spersonalobservationofpricelevelsandnotonsoundanalysis.

Overlay–thisreferstotheactofputtinganindicatorontopofanotherone.Asimpleexamplewouldbedisplayingamovingaverageofanindicatoronthesameplot.Inthiscasetheindicatoranditsmovingaveragewouldutilizethesamescaling.Manytimesanunrelatedindicatorcanbeoverlaidonanotherusingtotallyindependentpricescaling.

Percentage-Percentageisgenerallybetterthanaratiobecauseyouaremakingtheitemrelativetoitsrelatedbase.Forexample,thenumberofnewhighsby

itselfcanbemeaningfulintheshortterm,butoverlongperiodsoftimeandwithmoreandmoreissuestraded,therelationshipcannotremainconsistent.Ifyoutookthenumberofnewhighsasapercentageofthetotalissuestraded,thenthescalingwillalwaysbefromzerotoonehundredandlargeamountsofdatacanbeviewedwithsomeconsistency.

RateofChange–Usedinterchangeablywithmomentum,rateofchangeislookingatapieceofdatarelativetoalikepieceofdataatanearliertime.Forexample,withstockdata,a10-dayrateofchangewouldtaketoday’spriceandsubtractordividebythestock’sprice10daysago.Ifonetakesthedifferenceinpriceandthendividesbytheolderpriceyouwillseepercentagechanges.Generally,itisnotthevalueoftherateofchangethatisimportant,butthedirectionandpatternassociatedwithit.However,someoscillatorshaveconsistentlevelsthatcanbeusedasoverboughtandoversold.RateofChangeseemstomoreoftenthannotbeinreferencetothedifferenceinvalues,whereasmomentumismoreoftentheratioofvalues.Thelineshapewillbethesame,onlythenumbersthatmakeupthelinewillbedifferent.

Ratio-Aratioiswhenyoudivideonedatacomponentbyanother.Thiskeepstheminperspectiveandwillalleviatemanyoftheproblemsassociatedwithusingjustthedifference.Sometimesthenumeratoranddenominatorarenotbalancedandyougetanon-symmetricalproblemsimilartowhatyougetwiththeArmsIndex.Thisisreallynotaproblemaslongasyouareawarethatitexists.Finally,aratioofpositivenumbers(orsimilarsigns)isalwaysgoingtobegreaterthanzero.

Smoothing–thisisinreferencetoaveragingdataeitherbyasimpleorexponentialmovingaverage.Itisabetteradverbtousethanalwaystryingtoexplainthatyoutakethemovingaverageofitortaketheexponentialmovingaverageofit;justsayyouare“smoothing”it.Itisalsousedasaverbinasifyoucan“smooth”it.

SupportandResistance–Firstthedefinitionsofsupportandresistance,thenanexplanationastowhattheyare.Moreelaboratedefinitionsareavailableinalmostanytextontechnicalanalysis.Infact,oneofthebestdiscussionsofitisinStevenAchelis’book,“TechnicalAnalysisfromAtoZ,”wherehetiesittosupplyanddemand.Supportisthepriceatwhichanissuehastroubledroppingbelow.Resistanceisthepricelevelthatithastroublerisingabove.

AbouttheChartsinthisBookMostbreadthindicatorsaremathematicalequationsthatutilizebreadthdatasuchasadvances,declines,upvolume,down,volume,newhighs,newlows,etc.Usuallytheindicatorcanbedisplayedasalineplot,andinthisbookwillalmostalwaysbedisplayedbelowtheNewYorkCompositeIndex.TheNewYorkCompositeIndexisacapitalization-weightedindexofallstockslistedontheNewYorkStockExchange.Thisplotoftheindexisalsoscaledlogarithmicallyonthepriceaxis.Semi-logscaling(logarithmicallyononlyoneaxis)isbestforlongtermchartswherethedistancebetweeneachpricepointdependsonitsvalue.Thedistancebetween10and20isthesameasthedistancebetween30and60;bothare100%increases.

Thetimeframeforthechartwaschosentobestreflectthevalueoftheindicator.Someindicatorsareshownoverthefull40-yearperiod,whileothersareshownonlyoverafewyears.Manytimestheshortertimeframeswerechosenbecauseofthefrequentfluctuations(noise)oftheindicator.Chartannotationswereintentionallyavoidedtoallowthecharttoremaincleananduncluttered.Thiswayyoucantakeastraightedgeandalignthedatatoseethedetailsoftheindicators.

Somebreadthindicatorsarecombinationsofvariousconditionsthatmustbemetinorderforabuyorasellsignaltobegenerated.Thesearedisplayedasplotsthathaveupwardanddownwardspikesandsometimessteps.Theupwardspikesaregenerallyfor“buy”signalsandthedownwardspikesareforsellsignals.Someoftheplotshavespikesofdifferentlengths.Thisisanindicationthattheprocessofreachingasignalisamulti-stepprocessandallofthestepsaredisplayed.Inmostcases,thelongestspikeisthefinalorbestsignaltoactupon.Afewindicatorsstephigherandhighertotheirmaximumthenreverseandstepdownwardinasimilarmanner.Theseareusuallytheonesthathavemultiplebuyandsellparametersthatmustbemet.Eachupwardstepmeansonemorebuyparameterhasbeenmetoverasellparameter,andtheoppositeonthedownside.Alwaysreadtheassociateddiscussionnearthecharttoensureyouareinterpretingtheinformationcorrectly.

MulticollinearityIfyoufindagroupofindicatorsthatareessentiallytellingyouthesamethingandwithconsistency,youneedtopickoneofthemtouseandthendroptheothers.Iftheyareallsayingthesamethingtheyarenotassistingyouinyouranalysis.Thisisknownasmulticollinearityandisatrapyouneedtoavoid.Ensurethatyouareusingindicatorsthatmeasurethemarketsdifferently,andarediversified.Whilebreadthindicatorsaredifferentthanmostprice-basedindicators,therearemanybreadthindicatorsthatareessentiallyrevealingthesamething.

Manytimes,investorsthinkthattheyaremorecorrectintheiranalysisifmanyindicatorsaretellingthemthesamething.Theyaresupportiveofyouranalysisonlyiftheindicatorsarenotcollinear.Iftheyarecollinear,thenthesupporttheinvestorfeelsfromhavingalotofindicationsagreeismisleadinganddangerous.Thesupportfortheiranalysisgivesthemafalseconfidence.

CH3-BREADTHINDICATORSThisisthefirstchapterthatwillhighlighttheprocessofpresentingdetailsonallknownindicatorsofmarketbreadth.Itwillattempttoidentifythecreatoroftheindicatorormethodology,thesourceoftheinformation,andasmuchresearchontheindicatoraspossible.Theformulawillbedisclosedinmostcases,alongwithanumberofdifferentchartstoassistyouinunderstandingandinterpretingtheseindicators.Finally,anopinionfromtheauthorontheindicatoranditsinterpretationisgiven.

IndividualBreadthIndicatorFormatAtextbooklayoutisusuallyappreciated,especiallywhenabookisalsotobeusedasareferencemanual.Allindicatorsinthisbookarepresentedusingtheformatbelow.Ifyouseethatanitembelowisnotincludedwiththecoverageofanindicator,itisbecausetherewasnoinformationavailableforthatparticularitem.

AlsoKnownAs:Manytimesanindicatorisknownbymultiplenames.AgoodexampleofthisistheArmsIndex,whichisalsoknownasTRINandMKDS.Thiswillalsobewhereyoucangetinformationaboutverysimilarindicatorslocatedelsewhereinthisbook.

Author/Creator:Mostindicatorswerecreatedbysomeone.Ihaveattemptedtogivecreditwhentheinformationisavailable.

Datacomponentsrequired:Thesearethecomponentsofbreadthdatathatarerequiredtocalculatetheindicator.

Description:Thisisabriefdescriptionoftheindicatorwhichwillalsotrytoclearupanyproblemswithanyinterpretationofthemath.

Interpretation:Hereisthegenerallyacceptedindustryinterpretationoftheindicator,usingvaluelevels,zones,smoothingvalues,etc.Anumberofdifferentanalysts’varioustechniquesarealsomentionedhere.

Chart:Hereisachartthatbestdisplaystheindicator.Enoughdataisusedinthechartsothatonly“hand-picked”areasareavoided.Therearesomeindicatorsorbreadth-basedsystemsthatwerebeyondthecapabilitiesforcreatingachartandtheywillbesonoted.Manytimestherewillbeanumberofchartsshowingdifferentinterpretationsorusesoftheindicatorfromvariousanalysts.

AuthorComments:Heretheauthortriestoofferapersonalinterpretation,opinion,anduseoftheindicator.Becausetheauthordoesnotuseallofthem,hestilloffersthisinterpretation,includingsomemodificationsandideasforfurtheranalysis.Insomeinstances,hewillalsoofferamodificationthathebelieveswillenhancetheindicator.Afewindicatorsweredesignedforbuysignalsorsellsignals,butnotboth.Ontheseheattemptedtocreatethecomplementaryindicator.

Formula:Thisisintendedasanalgebraicformulafortheindicator.Therearesomemathsymbolsthatwillassistyou:

∑meanstheformulaafteritisaccumulatedorsummed.

√meansthesquarerootoftheformula.

Thereareanumberofformulaethatarejusttoocomplexforthissection.IfIfeltthatwasthecase,Iattemptedtowriteadescriptivenarrativeontheformula.Andinafewinstances,theindicatorwaspurelydesignedtobeavisualdisplayandnoformulaewouldassistyourunderstanding.

StockCharts.com’sSymbol:ThisisthesymboltousewhenusingStockCharts.com’swebsite.NotallchartsinthebookhaveasymbolbecausetheywerealreadyavailableinStochCharts.com’ssymbolcatalog.Manyonlyrequiredaratioordifferenceofcomponentssowerecreatedwithoutneedingaspecialsymbol.

References:Thisisabibliographywhereyoucanfindadditionalinformationontheindicatorand/oritscreator.Thismethodwaspreferredoveraformalbibliographyandattimes,therearenotesaboutaparticularbookormagazinearticleincludedhere.Displayingthemhereisamuchmoreusefullocationforreferencesinmyopinion.

ChapterFormatBecauseofthelargenumberofbreadthindicators,thechaptersonthebreadthindicatorsaredividedintodifferentcategoriesbaseduponthemathematicalrelationshipbetweenthebreadthpairs.Anindicatorpairrelatestotheadvancesanddeclines,thenewhighsandnewlows,andtheupvolumeanddownvolume.Pairscanbemathematicallyrelatedinanumberofways.Thedifferencebetweenthetwoandthedivisionofthetwoarethetwoprimarywaysthesepairshavebeenusedtocreatebreadthindicators.

Whennecessary,thenumeratorcontrolsinwhichcategorytheindicatorwillbe.IfA-DisinthenumeratoritisintheADDifferencecategory.Anumberofindicatorscouldbeineitherthedifferenceortheratiocategory.Forexample,theratiousedbyTomMcClellanandCarlSwenlinhas(A–D)inthenumeratorand(A+D)inthedenominator(A-D)/(A+D).Thenumeratorwillusuallycontrolthedirectionofanindicatorsothatiswhatwasusedtodeterminethecategorytheindicatorwillbein.

GeneralAdvanceandDeclineInformationAdvancingissues(advances)arethosewhosepriceincreasedfromthepreviousclosingprice.Decliningissues(declines)arethosewhosepricedecreasedfromthepreviousclosingprice.Abullishmarketwilltakemany,ifnotmost,issueswithit.Asthemarketrises,thenumberofadvanceswillremainfairlyhighwiththeusualoscillationsastradersmoveinandoutofthemarket.Mostoftentheadvancingissueswillstarttodeclineinnumberwellbeforethepriceactionreflectsamarketstartingtopeak.Thisisbecausefewerandfewerissuesarecontinuingtorise.Thepricescontinuetorisebecausemostmarketaveragesarecapitalizationweightedandthegeneralscontinuetoleadthecharge.Itiswhenthedeclinesbegintorisethatthetoppingformationisreachingitsfinalstages.

Ifyouareanalyzingdataoveralongterm(greaterthan1year),itishighlyrecommendedtoadjustanyrawformsofthedatabyusingaratioofittoamoreuniversalcomponent.Forexample,viewingtheadvancingissuesasapercentageoftotalissuesisbetterthanjustlookingatadvancingissues.Thesamegoesforthedecliningissuesandtheunchangedissues.Chart3-1showstherawadvanceanddeclinedata.Chart3-2showstheadvanceanddeclinedataasapercentageofthetotalissues.

Chart3-1

Chart3-2

GeneralNewHighandNewLowInformationThenewhighsandthenewlowsarenotrelatedliketheadvancesanddeclines.Anadvanceordeclineisbaseduponasingleday’spricechange.Anewhighornewlowisbaseduponthepreviousyear’spricechanges.

Aspreviouslystated,abullishmarketwilltakemanyissueswithit.Asthemarketcontinuestorise,thenumberofnewhighsshouldcontinuetoincrease.Manytimesthenewhighswillsurgeatthebeginningofabullmarket,thendropoff,onlytoreturntowardtheendofalongbullishadvance.Thisisbecausestocksthathavebrokenoutofcongestionareasandrisingabovetheirresistancelevelshaveunlimitedupwardpotentialonatechnicalbasis.Asthemarket’supwardmovestartstofalter,thefirstthingthathappensisthenumberofnewhighsstopsincreasing.Thenthenumberofnewhighswillbegintodecline.Asthetoppingprocessmatures,thenumberofnewlowswillslowlybegintoincreasebutwillnotdosodramaticallyuntilthemarketreallybeginstofall.

Ifthenumberofnewhighsbeginstodropduringamarketadvance,thisisquitebearish.Inastrongupwardmarketmove,evenifthenewhighsdonotcontinuetoincreaseisabearishwarning.Theydonothavetodropinnumber,justthefactthattheyarenolongerincreasingisnotgoodfortheupwardmovement.

Thetwochartsthatfollowusethenewhighsandnewlows.Chart3-3istherawnumbersandchart3-4isthenewhighsandnewlowsasapercentageoftotalissues.

Chart3-3

Chart3-4

GeneralUpVolumeandDownVolumeInformationUpVolumereferstothevolumeforthedayoftheadvancingissues.Downvolumeisthatvolumeforthedecliningissues.Stockscanstilladvanceandtheamountofvolumewillbethefirstindicationofaweakeningadvance.Asanupmovebeginstofalter,theupvolumewillbeoneofthefirsthintsthatallisnotwell.Itisgenerallynotthecasethatthedecliningvolumewillleadthedecliningissueswhenthemarketisinamaturingtopformation.Marketscandropmerelyfromalackofupvolume;theydonotneedalargeincreaseindownvolume.Asamarketdeclines,thedownvolumewillcomebackintoplayandcanbeusedtohelpidentifythebeginningofabottom.Thedownvolumewillquicklydryupandtheupvolumewillrisequicklyatamarketbottom.

Thenextthreechartsusetheupvolumeanddownvolume.Chart3-5istherawnumbersandyoucanseethatoverthelastfiftyyearsthegiantincreaseinvolumehasrenderedthisalmostuseless.Chart3-5bshowstheexactsamedatabutthescalingfortheupanddownvolumehasbeenchangedtosemi-logscaling;whichgreatlyenhancesthechart.Bothofthesechartsclearlyshowthedecreaseinvolumebeginningabout2008.Chart3-6istheupanddownvolumeasapercentageoftotalvolume.

Chart3-5

Chart3-5b

Chart3-6

CompleteListofBreadthIndicatorsChapter4–AdvanceDeclineDifferenceAdvances–Declines

AdvanceDeclineOverboughtOversoldPluralityIndex

AdvanceDecline–Fugler

AdvanceDeclineLine

AdvanceDeclineLine–1%

AdvanceDeclineLine–EakleAdvanceDeclineLine–NormalizedAdvanceDeclineLine–BoltonAdvanceDeclineLine–AdjustedTotalIssuesBigMoversOnly

AdvanceDeclineLineOscillatorAbsoluteBreadthIndex

AbsoluteBreadthIndex–AdjustedAdvanceDeclinePower

CoppockBreadthIndicator

HaurlanIndex

McClellanOscillator

McClellanSummationIndex

MerrimanBreadthModel

SwenlinITBreadthMomentumOscillatorSwenlinTradingOscillator–BreadthZahorchakMethod

ZahorchakMethodAlternate

Chapter5–AdvanceDeclineRatioAdvance/DeclineRatio

BreadthThrust

BreadthThrustContinuation

DuarteMarketThrustIndicatorEliadesSignoftheBear

HughesBreadthMomentumOscillatorPanicThrust

STIX–ShortTermTradingIndexChapter6–AdvanceDeclineMiscellaneousAdvances/IssuesTraded

AdvanceDeclineDivergenceOscillatorAdvanceDeclineDiffusionIndexBreadthClimax

DecliningIssuesTRIX

DisparityIndex

DynamicSynthesis

UnchangedIssues

VelocityIndex

Chapter7–NewHighsNewLowsIndicatorsHighLowDifference

NewHighs–NewLows

NewHighNewLowLine

NewHighs&NewLowsOscillatorNewHighs&NewLowsDerivationsHighLowRatio

NewHighs/NewLowsRatio

HighLowMiscellaneous

NewHighs&NewLows

NewHighs%TotalIssues

NewLows%TotalIssues

HighLowLogicIndex

HighLowValidation

Chapter8–UpVolumeDownVolumeIndicatorsUpVolume

DownVolume

ChangedVolume

Up&DownVolume

McClellanOscillator–VolumeMcClellanSummationIndex–VolumeMerriman’sVolumeModel

SwenlinITVolumeMomentumOscillatorSwenlinTradingOscillator–VolumeUpVolumeDownVolumeLine

CumulativeVolumeRatio

UpDownOnBalanceVolume(OBV)VolumePercentageRatio

Upside–DownsideVolume

Upside/DownsideVolumeRatioZweigUpVolumeIndicator

Chapter9–CompositeIndicatorsArmsIndex

ArmsOpenIndex

AdvanceDeclineNewHighNewLowBretzTRIN-5

CashFlowIndex

CompositeTapeIndex

DysartPositiveNegativeVolumeEliadesNewTRIN

HallerTheory

HindenburgOmen

MarketThrust

McClellanOscillatorwithVolumeMcClellanSummationIndexwithVolumeMeyersSystems

MovingBalanceIndicator

TechnicalIndex

TitanicSyndrome

TrendExhaustionIndex

Chapter11–Non-InternalBreadthIndicatorsStocksAbove200daySimpleandExponentialAverageStocksAbove50daySimpleandExponentialAverageBullishPercent

ParticipationIndex,bothUpandDownCommonStockOnlyIndicatorsAdvanceDeclineLineMcClellanOscillatorMcClellanSummation

CH 4 - Advance Decline DifferenceIndicatorsAdvances-Declines

Thebreadthindicatorsinthischapterallutilizethedifferencebetweentheadvancesandthedeclinesastheirprimaryrelationship.

AdvanceDeclineDifferenceIndicators

Advances–Declines

AdvanceDeclineOverboughtOversold

PluralityIndex

AdvanceDecline–Fugler

AdvanceDeclineLine

AdvanceDeclineLine–1%

AdvanceDeclineLine–Eakle

AdvanceDeclineLine–Normalized

AdvanceDeclineLine–Bolton

AdvanceDeclineLine–AdjustedTotalIssues

BigMoversOnly

AdvanceDeclineLineOscillator

AbsoluteBreadthIndex

AbsoluteBreadthIndex–Adjusted

AdvanceDeclinePower

CoppockBreadthIndicator

HaurlanIndex

McClellanOscillator

McClellanSummationIndex

MerrimanBreadthModel

SwenlinITBreadthMomentumOscillator

SwenlinTradingOscillator–Breadth

ZahorchakMethod

Advances-Declines

AlsoKnownAs:OverboughtOversold

Datacomponentsrequired:Advances(A),Declines(D).

Description:Thisisthedifferencebetweentheadvancingissuesandthedecliningissues(AdvancesminusDeclines).

Interpretation:Anytimeyoudealwiththedifferenceortheratiooftwoitems,itisalwaysbesttosmooththedatabecausetherawinformationwillbetooerratictobeuseful.Chart4-1isthe21daymovingaverageoftheadvancedeclinedifference.Youcanseethatitisgenerallyabovethezerolineduringupmovesandbelowitduringdownmoves.Thearithmeticsmoothinghasacoupleofanomalieswithit;itunfortunatelydelaysthecrossingsofthezeroline,butthenavoidsalargenumberofwhipsaws(shorttermcrossingthatreversedirectionquickly).Usingshortertermperiodswouldhelpthetimingofthecrossingsbutincreasethewhipsaws.

Chart4-1

AuthorComments:GeraldAppelhasstatedthathelooksatthisdifferenceinAdvancesandDeclinesbysmoothingitwitha3-dayexponentialaverage.Hesaidina1994interviewthatwhenthisindicatorwentabove500,itcouldbethestartofagoodrally.Also,ifitgoesbelow-600,standbyforagooddownmove.SoonaftertheinterviewwithGeraldAppel,thevolumeandnumberofissuesontheNewYorkStockExchangesbegantoincreasesignificantly.Chart4-2showsthisadvancedeclineindicatorwiththezoneschangedto+1000and-1000.Theseseemtokeephisconceptaliveandup-to-date.

Chart4-2

JustinMamis,who,withStanWeinsteinstartedtheProfessionalTapeReadernewsletter,likestolookatthe10-dayaverageoftheAdvanceDeclinedifferenceplottedwiththe30-dayaverageofthedifference.Thedigital(squaredcorners)lineinchart4-3isshowingthetimeswhenthe10-dayaverageisabovethe30-dayaverage.Wheneveritisabovethezeroline,the10dayisabovethe30dayanditisbullish.Ifyouarefamiliarwithamovingaveragecrossoversystem,thisisverysimilar;insteadofusingpricethisindicatorusesthedifferencebetweenadvancesanddeclines.

Chart4-3

Formula:A-D

StockCharts.comSymbol:$NYADV-$NYDEC,digital:!BINYADOOD

References:

Appel,Gerald,“GeraldAppel,withSystemsandForecasts.”Stocks&Commodities,Volume12,March1994,pp98-105.

Mamis,Justin,“JustinMamisandtheMeaningofLife.”Stocks&Commodities,Volume13,August1995pp359-365.

AdvanceDeclineOverboughtOversold

AlsoSee:Advances-Declines

Datacomponentsrequired:Advances(A),Declines(D)

Description:TherearemanyderivativesontherelationshipoftheAdvancesandDeclinesandthisisjustoneofthem.Thisisasmoothedversionoftheadvancesminusthedeclines.Thisisactuallyacontinuationoftheprevioussectionbecausetherearesomeanalystswhorefertothisastheoverboughtoversoldindicator.

Interpretation:TakingthedifferencebetweentheAdvancesandtheDeclinesproducesanoscillatorthatmovesaboveandbelowazeroline.Smoothingthatlinewillreducethedailyfluctuationsandprovideabettertoolfordeterminingoverboughtandoversold.Whileitseemstoshowoverboughtandoversoldareaswell,itdoesnotdosowiththeconsistencyonewoulddesiretoutilizethisindicator.SteveAchelisclaimsthatarangebetween+200and-200willyieldgoodoverboughtandoversoldsignals.Chart4-4showstheoverboughtoversoldindicatorusingaten-dayexponentialsmoothing.

Chart4-4

AuthorComments:Thisisagoodexampleofanindicatorthathastwodefinitionsfromtworespectedmarkettechnicians.NormanFosbackusestheratioofAdvancestoDeclinesfortheoverbought/oversoldindicator.StevenAchelisusesthedifferenceofAdvancesandDeclinesfortheoverbought/oversoldindicator.Eithercasecanbeeasilyjustified;itjustbecomesconfusingtonewcomers.Theybothaccomplishessentiallythesamegoal,andthatisarelationshipbetweentheadvancesandthedeclines.

Ihavegenerallygottenawayfromthesomewhatstandard10periodsmoothingandprefertousea21-daysmoothingformostwork.Inanoscillatorsuchasthis,itgreatlyreducesthenoiseandsharpenstheinterpretationoftheindicator.Youcanseefromchart4-5thattheareabetweenthezerolineand+400iswhenthemarketisbullish.Similarly,theareabetweenthezerolineand-400pointsoutdownmarketswell.Onewaytofurtherimprovethisistobroadentheareaaroundthezerolinetodefinetheneutralareas.Forexample,theareabetween

+150and+400isbullishandtheareabetween-150and-400isbearish.Above+400continuestorepresentoverboughtandbelow-400oversold.

Chart4-5

GeorgeLindsayusedanunsmoothedversionofthedifferencebetweenAdvancesandDeclines.Helookedforatriplezigzagpatternintheplotofrawadvancesminusdeclines.ThreesuccessivelyhigherpeaksintheDowJonesIndustrialAveragealongwiththreesuccessivelylowerpeaksintheadvancedeclinedifference,wouldbehissellsignal.Thisistypicalnegativedivergenceandusedbymanytodayandisalsodifficulttoquantifyandtotallysubjective.Chart4-6showsacoupleofexamplesofLindsay’stechnique.

Chart4-6

RobertNurock,whocreatedtheWallStreetWeekIndex,alsousedanadvancedeclinecomponent.Heuseda10-daysumofthedifference.Abullishsignalwasgeneratedwhenfromapointwheretheindexexceeds1000toapeakandthendowntoapoint1000belowthepeak.Abearishsignalwasfromthepointwheretheindexdropsbelow-1000toatroughandthenuptoapoint1000abovethetrough.Theconceptherewastogivetheindicatoranopportunitytoreverseandnottrytopicktheactualtoporbottom.

RobertKinsmanuseda7periodexponentialaverageandcalledittheKinsmansmoothedA-D.Hisconceptwastoidentifythegeneralhighlowrangeforthisoscillatorandthenlookforspikesoutsidethatrange.Hefurtherstatesthatlargespikesoutsidetherangearemorerevealingthanjusttradingopportunities,butareaprecursortosignificanttrendchangesinthemarket.Chart4-7showslinesat+600and-600.Youcanseethatthespikesoutsidethosebandsgenerallyidentifiedturningpointsinthemarket.

Chart4-7

Formula:21dayMovingAverage(A–D)

StockCharts.comSymbol:$NYADV-$NYDEC

References:

Achelis,Steven,“Forecastingthemarketwiththeoverbought/oversoldindicator.”StocksandCommodities,July,1987,pp231-232.

Favors,Jerry,“TheLindsayA-DIndicator.”StocksandCommodities,Volume10,February1992,pp75-76.

Kinsman,Robert,“Advance–DeclineLineRedux.”StocksandCommodities,”Volume14,January1996,29-33.

PluralityIndex

Author/Creator:PaulDysartwroteaboutitin1937,RalphRotnemusedit,andAlanShawnamedit.

Datacomponentsrequired:Advances(A),Declines(D).

Description:Thisisamovingtotaloftheabsolutedifferencebetweenadvancesanddeclinesovera25-dayperiod.AccordingtoJamesAlphier,thiswaspartofPaulDysart’sbroader“TheoryofEqualization.”

Interpretation:AlanShawusedbenchmarksof6,000and12,000.Iftheindicatordropsbelow6,000,asellwarningissignaled.Hethenwaitsuntiltheindexturnsbackup,atwhichpointthesignalbecomesadefinitesell.Iftheindicatorrisesabove12,000,itgivesabuyalert,atwhichpointhewaitsuntilitstartstodrop,whenitgivesadefinitebuysignal.Chart4-8showsthistechnique.

Chart4-8

Thereasoningbehindthisindicatoristhatthereisusuallycomplacencyatthetopandpanicatthebottom.JohnMcGinley,ofTechnicalTrends,saysthatabullmarketdiesofexhaustion.Whileatmarketbottoms,everyoneisrushingintobuy.

AuthorComments:IhaveseenthePluralityIndexcalculatedusingamovingaverage,insteadofasum.Theylooksimilar,butthezonesneedtobereset.

Since1994thisindicatorhashadanupwardbiasthatmakesAlanShaw’szonesinneedofadjustment.Itwouldappearthat23,000canreplaceShaw’s12,000zone,andthat14,000canreplacethe6,000zone.Incidentally,I’mquitesureAlanShawknowsthisoratleastusesdifferentzonesthanwhenArtMerrillwroteaboutitin1990.ArtMerrillclaimsthatthismustbeadailyindicatorandnotonethatusesweeklydata.AlanShawsaysthatthisindicatordoesn’talwaysgiveasignal,butwhenitdoes,itshouldbenoted.Chart4-9showszonesat23,000,14000,and12,000.

Chart4-9

Formula:∑|A–D|over25days.

StockCharts.comSymbol:!BINYPI

References:

Merrill,ArthurA.,“Plurality.”Stocks&Commodities,Volume8,April1990,pp137-138.

AdvanceDecline-Fugler

Author/Creator:GeorgeFugler

Datacomponentsrequired:Advances(A),Declines(D).

Description:GeorgeFuglercalledthishis“quickanddirty”indicator.IfvalueofAdvancesminusDeclinesispositiveonthreesuccessivetradingdays,anup(buy)signalingenerated.Iftheyarenegativeonthreesuccessivedays,adown(sell)signalisgenerated.

Interpretation:ArthurMerrillsaidthathisindicatorisafflictedwithwhipsaws,butitstaysingearduringatrend.Chart4-10showseachsignalforupanddown.Theupspikesrepresentthebuysignalsandthedownwardspikesrepresentthesellsignals.Thereareusuallyafewsimilarsignalsinarowbeforeareversal,sooneshouldignoremultiplesignals.

Chart4-10

AuthorComments:ArthurMerrilliscorrectwhenhesaidthishaslotsofwhipsaws.Hewasneveronetomincewords.

Formula:(A–D)

StockCharts.comSymbol:!BINYFBS

References:

Merrill,Arthur,“MoreTrendDetection.”Stocks&Commodities,Volume6,Sept,1988,pp.219.

AdvanceDeclineLine

Author/Creator:ColonelLeonardP.Ayers

Datacomponentsrequired:Advances(A),Declines(D)

Description:TheAdvanceDeclineLineisoneofthemostpopularwaystomeasurethebreadthofthemarket.Thenumberofdecliningstocksissubtractedfromthenumberofadvancingstockseachday.Iftheadvancesoutnumberthedeclines,thenettotalisaddedtotheprevioustotal.Ifthedeclinesoutnumberadvances,thenetdifferenceissubtractedfromtheprevioustotal.Inanutshell,whentherearemoreadvancesthandeclines,thelinegoesup.Whentherearemoredeclinesthanadvances,thelinegoesdown.TheAdvanceDeclineLinecanbeusedwitheitherdailyorweeklydata.

Forexample,if800stocksadvancefortheday,and450fall,theadvancedeclinedifferenceforthedaywouldbe+350.Thisvalueisthenaddedtothepreviousday’sadvancedeclinelinevalue.Ifthenumberofdeclineswasgreaterthanthenumberofadvancesandthedifferencebetweenthetwowas-200,thenthatamountwouldbesubtractedfromtheAdvanceDeclineLine’spreviousvalue.Hereisanotherexample:

Interpretation:TheAdvanceDeclineLineisusuallycomparedtooneofthepopularmarketpriceindices,preferablytheindexthatisalsorelatedtotheadvancesanddeclinesthatarebeingused.Forexample,theNewYorkCompositeIndexshouldbeusedwiththeNewYorkStockExchangeadvancesanddeclines.Theyshouldtrendinthesamedirection.WhentheAdvanceDeclineLinebeginstodivergefromtheindex,anearlyindicationisgivenofapossibletrendreversal.

Duringastrongadvance,theAdvanceDeclineLinenormallywillmovemorethantheS&P500orDowIndustrials.Ifthemarketaveragesreachanewhigh

andtheAdvanceDeclineLinefailstofollowsuit;thatcanbeanearlyindicationofnon-confirmation.Chart4-11showstheadvancedeclinelineforthelast40years.Thenumbersonthescaletotherightofthechartareessentiallymeaninglesssincetheyreflectthesummeddifferencefromthefirstdateonthechart.Thenumberswillchangebaseduponwhenyoustartthecalculation.

Chart4-11

AuthorComments:Thematerialinthissection(AdvanceDeclineLine)wasreviewedbyTomMcClellanalongwithsomeaddedmaterialfromhimwithmysincereappreciation.You’lllearnmoreaboutTomandhisfamilyinlatersections.

Iftherewasonebreadthindicatorthathasbeenanalyzed,modified,adjusted,anddiscussedmorethananyother,theAdvanceDeclineLineisprobablythewinner.Likemanyoftheotherversionsofthispopularbreadthindicator,itseemsbestatdeterminingtheendsoflongertermupmovesinthemarket.ItseemsthattheAdvanceDeclineLinegivesalotoffalsesignalsattops,butis

muchbetteratmarketbottoms.Itisnottheabsolutenumericalvalueoftheadvancedeclinelinethatmatters,butisitsacceleration(upanddown)orlackthereofthatisimportant.

AcommonmisconceptionofanalystsistocomparetherateofchangeoftheAdvanceDeclineLinewithamarketindex.Oneisbaseduponmovementandtheotherisbasedonprice.Becausetheunitsaredifferent,suchcomparisonsaredifficulttomakeinaconsistentway.Theoneanalogythatseemstofitthisbestisthatthesmartmoneyalwaysleavesthemarketfirst,usuallyquiteabitoftimeaheadofthemasses.Thesmartmoneyisalsothefirsttogetintothemarketafteradecline.Chart4-12showsthedivergencethatoccurredin1987thathelpedidentifythedropinthemarketsthatstartedinAugustofthatyear,butisusuallyonlyrememberedbytheOctober13thplunge.AcloseexaminationoftheAdvanceDeclineLineshowsitwasdroppingsignificantlybeforethatday.

Chart4-12

Chart4-13showsthetoppingdivergenceintheadvancedeclinelinein1998;atimewheneveryonebelievedthemarketswerenevergoingtostoprising.Thisveryearlywarningpannedoutasthemarketsralliedagaininlate1998throughmuchof1999,thenbeganoneofthebiggestbearmarketsmostwillseeintheirlifetime.

Chart4-13

Chart4-14showsfivedivergentpattersoverthelast20years.Threeofthemareidentifyingmarkettopsin1987,1990,and1999,whiletheothertwoareidentifyingmarketbottomsinearly2003andmid-2004.

Chart4-14

ThechiefvalueoflookingattheAdvanceDeclineLinecomesfromitsrelationshiptoliquidity.Whenthereisalotofmoneycomingintothemarket,ittendstospreaditselfoutintoamajorityofissueswhichshowsupinthebreadthstatisticswithmoreadvancesthandeclines.Itisimpossibletogetamajorityofstockstogoupunlessthereissufficientliquiditytospreadaround.Conversely,whenliquidityistight,thenthedwindlingsupplyofmoneytendstogointoonlythehighestqualityissues,resultinginmoredeclinesthanadvances.ItispossibleforthemajorpriceindicestoremainaloftwhiletheAdvanceDeclineLinestartsdeclining,providedthatthelimitedamountofliquidityischanneledintotherightstockstokeepthepriceindicesup.Butthisisaveryweakconditionforthemarket,anditusuallyresolvesitselfwithaneventualnegativeoutcomeforthepriceindices.The1998-2001period,wasagreatexampleofthis.

TheAdvance-DeclineLinehasaninherentdownwardbias,especiallycompared

topriceindices.Thisisbecauseoftheofthesurvivorshipbiasinthepriceindices.Onlythebig,established,andsuccessfullarge-capcompaniesgettoseetheirstockperformancehavemuchofanimpactonthepriceindices.ButtheAdvance-DeclineLineisamuchmoreegalitarianindicator,whereeverysinglelistedstockgetsanequalvote,boththegreatonesandthelousyones.CompanieswhichgopublicandthenendupgoingbankruptwillseealotofdaysofcountingtowardthedeclinesasthepricegoesfromtheIPO(initialpublicoffering)pricetozero.ThisisespeciallytruefortheNasdaqAdvanceDeclineLinebecausetheNasdaqmarkethaslowerstandardsforlistingofcompaniesthantheNYSE.

ItisbecauseofthisinherentdownwardbiasthatanalystsarebetterservedbyfocusingontheupwardordownwardaccelerationtakingplaceintheAdvanceDeclineLineratherthanontherawpositionofit.

OneproblemwiththestandardAdvanceDeclineLineisthatthechangingnumberofissuestradedontheexchangeaffectstheamplitudesoftheAdvanceDeclineLine’smovements.Manyanalystsadjustforthisbydividingtheadvancedeclinedifferencebythetotalnumberofissuestraded,ormoresimplybythetotalofadvancesplusdeclines:(A-D)/(A+D)

Thedailyvaluesarethensummedaswiththeoriginalversion.

InadditiontousingdailyadvancedeclinedatatoconstructanAdvanceDeclineLine,onecanalsouseweeklydata.Chart4-15showstheweeklyadvancedeclineline.Rememberthatthisusesweeklydatafortheadvancesanddeclinesandisnotaderivationofthedailydata.

Chart4-15

Formula:∑(A–D)

StockCharts.comSymbol:Daily$NYADV-$NYDEC,Weekly$NYADVW-$NYDECW

References:

McClellan,ShermanandTom,“TheMcClellanMarketLetter.”

Justaboutanytechnicalanalysisbookthatcoverstechnicalmarketindicatorswillhaveinformationontheadvancedeclineline.

AdvanceDeclineLine–1%

Alsoknownas:MomentumIndexbyStanWeinstein

Author/Creator:CarlSwenlinandStanWeinstein

Datacomponentsrequired:Advances(A),Declines(D).

Description:ThisistheAdvanceDeclineLinewithalongtermsmoothingof200days.CarlSwenlinprefersusinganexponentialmovingaverageandStanWeinsteinprefersasimple/arithmeticmovingaverage.

Interpretation:StanWeinsteinsuggeststhatitgivesbuyandsellsignalswhenitcrossesthezeroline.Frombelowtoabovethezerolinewasbullishandfromabovetobelowwasbearish.Hefurtherrefinesittosaythatthelongeritremainedononesideofthezerolinebeforecrossingit,thebetterthesignal.Also,thefurtherintopositive(abovezero)ornegative(belowzero)territorythatithadbeenwouldaddtothevaluewhenitdidcrossthezeroline.Hismostmeaningfulbearishsignaliswhentheindicatorhasbeeninpositiveterritoryforquiteawhileandmovedtoanextreme.Chart4-16showsWeinstein’sMomentumIndex.

Chart4-16

AuthorComments:IfoundWeinstein’scommentthatthiswasmorehelpfulatspottingtopsthanbottomstobeinteresting.Thisisnotusuallythecasewhenitcomestotechnicalindicators.Ibelievethefactthatheusedasimplemovingaveragemightbethereason.Remember,withasimpleaverage,thedatafrom200daysagoiscarryingthesameweightasthemostrecentdata.Toreallymakethispoint,thedatafromsixtoeightmonthsago(60+days)iscarryingthesameweightasthedatainthelastthreemonths.Mostmarkettopsarelongspreadoutaffairsofdistributionandtakeawhiletobeputinplace.Thiswouldsomewhatexplainthat,andalsowhyWeinsteinthoughtitwasnotthatgoodatbottoms,asmostbottomsaresharpanddecisive.

Ihavealwayspreferredtouseexponentialsmoothingwhenusinglargetimeperiods.InthiscasetheSwenlinversionseemsbetteratkeepingyouinmostofthemove,eitherupordown.Additionally,Carlusestheratioofthedifferencebetweenadvancesanddeclinesdividedbythesumofadvancesanddeclines.HereiswhatCarlSwenlinsaysaboutit:“Ifinditmuchmoreusefultowatchwherethisindicatorformstopsandbottoms.Forexample,in1990,whentheDowmadetwosuccessivenewhighs,the1%AdvanceDeclineLinewastoppingbelowthezeroline.The1990bearmarketfollowedimmediatelyafterthesecondtop.Againinlate1994,astheDowwasputtinginadoubletop,thisindicatorwastoppingbelowthezeroline.Themarketsubsequentlywenttoitsfinallowpriortothemonsterrallyof1995,whichleadstothesignificanceofbottomsonthisindicator.Whenyouseeitbottomingintheareaof-100to-150,chancesarethatthemarketisputtinginamajorlow.Thishappenedinlate1994,late1990,late1987,andmid-1984.Thebottomin1981didnotleadtoamajorrally,butitwasfollowedin1982bytwohigherindicatorbottomscorrespondingwithtwolowermarketlows,thefinallowbeinginAugust,1982.”Chart4-17showsCarlSwenlin’sexponentialversionofthemomentumindex,whichhecalls1%EMA(exponentialmovingaverage)ofAdvanceDeclines.Whileitoffersmorewhipsaws,itisalsoconsiderablymoretimelythantheWeinsteinversion.

Chart4-17

Formula:PreviousValue+(A–D)smoothedby200days.

StockCharts.comSymbol:$NYADV-$NYDEC

References:

Weinstein,Stan.SecretsforProfitinginBullandBearMarkets.DowJones-Irwin,Homewood,IL.,1988

AdvanceDeclineIndex–Eakle

Author/Creator:Eakle

Datacomponentsrequired:Advances(A),Declines(D).

Description:ThisisasmoothedrateofchangeoftheAdvanceDeclineLine.Itwasoriginallyusedasaweeklyindicatorwithasmoothingof35weeksandthena2-weekrateofchange.

Interpretation:Becauseofthesimplicityofthisindicator,usingtheconceptondailydataseemedreasonable.Chart4-18showstheEakleadvancedeclineindexusinga10day(2weeks)rateofchangeanda175day(35weeks)smoothing.

Chart4-18

AuthorComments:TheonlysourceforthiswasJohnMcGinley’sTechnicalTrendsservice.Sincethedailyversioninchart4-18didnotseemtoworkverywell,here,inchart4-19istheweeklyversionasitwasoriginallydesignedtobeused.Marketbottomsseemtobewellidentifiedbythedownwardspikesintheindicatorandwhenevertheindicatorisabovethezeroline,themarketisgenerallybullish.However,itdoestendtostaybullishtoolonganddoesnotseembeworkwellfortops.

Chart4-19

Formula:∑(A–D)

StockCharts.comSymbol:!BINYEAD,weekly:!BINYEADW

References:

McGinley,John.TechnicalTrends.Wilton,CT.

AdvanceDeclineLine-Normalized

Author/Creator:TusharChande

Datacomponentsrequired:Advances(A),Declines(D).

Description:ThisistheadjustedAdvanceDeclineLinenormalizedwithamovingfive-dayformulasimilartothatusedinGeorgeLane’sstochastics.ThisprocessshowsextremesintheAdvanceDeclineLine.Alsolikestochastics,theuseof20foroversoldand80foroverboughtworkswell.

Interpretation:Usingashortperiodsuchas5daysmakesthismoreofatradingoscillator.Chandesaysthatoversoldvaluesofzeroandoverboughtvaluesof100wouldbegoodfortrading.Chart4-20showsthenormalizedadvancedeclinelinefortradingasChandesuggests.

Chart4-20

AuthorComments:TusharChandehasbeenabigcontributortothefieldoftechnicalanalysis,soIpayparticularlycloseattention,notonlytohiswork,buttrytounderstandtheconceptheisrevealing.Totakethisnormalizingconceptandreducethesignals,Iuseda21-dayperiodforthenormalizationandthensmoothedtheresultswitha7-dayexponentialaverage.Thismakestheindicatorslowerandbetterforintermediateanalysis.Youcanseeinchart4-21thatwhentheindicatorisrisingandgoesabove50,itistheearlypartofamarketrise.Aftertheindicatorgoesabove80,andthendropsbackbelow80,youcanlegoutofyourlongposition.Sellallofitwhenitgoesbelow50.

Chart4-21

Formula:PreviousValue+Today’s(A–D)=AD,(((AD–lowestvalue(AD))/(highestvalue(AD)–lowestvalue(A)))*100

StockCharts.comSymbol:!BINYADLN5and!BINYADLN21

References:

Chande,Tushar,“BreadthStixandOtherTricks.”StocksandCommodities,Volume12,May1994,pp.211-214.

AdvanceDeclineLine–Bolton

AlsoKnownAs:BoltonTremblay

Author/Creator:HamiltonBolton

Datacomponentsrequired:Advances(A),Declines(D),Unchanged(U).

Description:ThiswasanattemptbyBoltontoremovedownwardbiasintheAdvanceDeclineLine.Itwasthesquarerootofthedifferenceofadvancesanddeclines,withthatdifferencedividedbytheunchangedissues.ThisisanenhancedAdvanceDeclineLine,inthat,whenthemarketisstrong,itgivesaslightpushtoeithertheadvancingsideorthedecliningside,dependinguponwhichisstronger.

Interpretation:ThisisyetanotherversionoftheAdvanceDeclineLine.Consideringitsattempttoremovedownwardbias,thisversionshoulddefinitelybeconsidered.Bygivingtheunchangedissuesweight,itcanallowforthisversiontostarttoslowdownitsascentalittlesoonerthanthemoretraditionalversion.Thisfollowsthelogicofthediscussionthatasamarketstartstopeak,thenumberofunchangedissueswillexpand.Chart4-22showstheBoltonversionoftheAdvanceDeclineLine.

Chart4-22

AuthorComments:MartinPringusesthisversionandthatisgoodenoughfor

me.PringsaysthatBoltondevelopedthisbecauseitwasbetteratreflectingtheunweightedindicessuchastheValueLinecomposite.SincetheValueLinedatawasnotavailablepriortothe1960s,thisgavehimawaytoevaluateunweighteddataformanyyearspriortothat.

Thereisn’tmuchwrittenabouthis;IrememberitfromtheoldCompuTracdaysandfoundreferencestoitinPring’sandColby’sbooks,howevernocharts.Ibelievethesquarerootofanegativenumberisthereasonyoudonotfindthisinchartingsoftwareor,infact,chartsofitanywhere.Imadeafewassumptionstoovercomeit,andbelievehavedisplayeditcorrectlyinthechart4-22.Also,Ifoundthe21-daysmoothedversionoftheratiotobeinterestingasshowninchart4-23.

Chart4-23

Formula:PreviousValue+SquareRootof((A–D)/U)

StockCharts.comSymbol:!BINYBADLand!BINYADBT

References:

Dworkin,Fay,“DefiningAdvance/DeclineIndicators.”StocksandCommodities,Volume8,July1990,pp.274-278.

Pring,Martin,“InternalMarketMomentum.”StocksandCommodities,Volume11,July1993,pp.298-305.

Pring,MartinJ.TechnicalAnalysisExplained.McGraw-Hill,1985.

Colby,RobertW.TheEncyclopediaofTechnicalMarketIndicators.NewYork:McGraw-Hill,2003.

AdvanceDeclineLine–AdjustedTotalIssues

AlsoKnownAs:TheAdvanceDeclineRatio

Author/Creator:RichardRussell

Datacomponentsrequired:Advances(A),Declines(D),TotalIssues(TI)

Description:RichardRussellsaysthatthiswasconceivedbyColonelLeonardP.AyresandJamesHughesin1926,andthatitremainedrelativelyobscureuntilhestartedhisnewsletter,DowTheoryLetters,in1957.Thisindicatorisanattempttoreducethelargeincreaseinissuesandnormalizethedifferencebetweentheadvancesanddeclinesbydividingthatdifferencebythetotalissuestraded.TheniscalculatedliketheAdvanceDeclineLinebyaddingeachsuccessivedifferencetothepreviousone.

Interpretation:LookingfordivergencewiththeindexisthemostcommonuseoftheAdvanceDeclineLine,andthisversionisnodifferent.Itisanormaltendency,duringbullmoves,fortheretobemoreadvancingdaysthandecliningdays,andindownmarkets,thereverseistrue.Chart4-24showstheAdvanceDeclineLineadjustedforthetotalnumberofissues.

Chart4-24

AuthorComments:RichardRussellwasprobablyoneofthefirsttousethedifferencebetweentheadvancesanddeclinesdividedbythetotalissuesinhis“A-DRatio”publishedasabookofchartsin1962.ThisseemstoenhancethemorepopularAdvanceDeclineLineandoffersverygoodlongtermdivergencepatterns.Youcanseeintheabovechartthatwhenthemarketisinagooduptrend,thisindicatortrendsrightalongwithit.However,thefirstsignofweaknessinthepriceactionisreadilyevidentintheadjustedAdvanceDeclineLine.

Formula:∑((A–D)/TI)

StockCharts.comSymbol:$NYAD:$NYTOT

References:

Russell,Richard,1975,DowTheoryLetters,SanDiego,CA.

BigMoversOnly

Author/Creator:GregMorris

Datacomponentsrequired:Advances(A),Declines(D),TotalIssues(TI)

Description:ThisistheAdvanceDeclineLineusingonlydayswheneithertheadvances,declines,orbothwereaboveapredeterminedpercentageoftotalissuestraded.Initially,thiswasdevelopedinanattempttoremovedaysofveryinactivetrading,suchastheFridayafterThanksgiving,daysinwhichtheexchangeswerenotopenallday,etc.

Interpretation:TheintentwastofilterouttheboringdaysinthestandardAdvanceDeclineLineanduseonlydatawheneitherthenumberofadvancesordeclinesaresignificant.Longperiodsofinactivityinthemarketcanstillhaveabiaseitherupwardordownward.Itwasfeltthatthosetradingdaysdidnotadequatelyreflecttheunderlyingtrendsofthemarket.Byremovingacertainpercentageofinactivedays,thismodificationtotheadvancedeclinelinereflectsonlythemorepowerfulmovesinthemarket.Chart4-25showstheAdvanceDeclineLinewheredayswithlessthan35%oftotalissues(eitheradvancesordeclines)removed.Itseemstoreflectthemarketquitewell.

Chart4-25

AuthorComments:WhenIfirstdevelopedthisbackinthe1980s,Iusedafixednumberof1200forthelimitonwhethertheadvancesordeclinesforthatdaywouldbepartofthisindicator.Likemostbreadthindicators,adjustingforthebigincreaseinissuestradedwasnecessary.Ifyoulookatalongtermchartofthisindicator,youwillseethatitwillbetterreveallongertermtrendsthanmostAdvanceDeclineLineindicatorsusedinthestandardormoregenerallyacceptedmanner.Thisisgoodforkeepingthe“bigpicture”inmindduringyouranalysis.Chart4-26removesalladvancedeclinedatalessthan50%oftotalissues.Itisinterestinghow,duringoneofthebigbullmarketsinhistory,from1988to2000,thiswentdown.Whatdoesthatmean?Somewherebetween35%and50%ofthelargebreadthmovesofthemarketwerenotpresentinthoseyears.ThisisalsoproventruebylookingatZweig’sBreadthThrust(chapter5)where,beginningin1984,therewerenobreadththrustsignalsuntil2004.ThisBigMoverslinelimitedtothetop50%breadthdaysalsoreflectsthat.

Chart4-26

Formula:∑(A>%TI–D>%TI).

StockCharts.comSymbol:!BINYBMO35and!BINYBMO50

References:

Morris,Greg,1995,“IndicatorsandTradingSystemsSoftware,”G.MorrisCorporation,Dallas,TX.

AdvanceDeclineLineOscillator

Datacomponentsrequired:Advances(A),Declines(D)

Description:Thisisa21-dayrateofchangeoftheadvancedeclineline.Rateofchangeiswhereyoutaketoday’sindicatorvalueandsubtractthevaluefrom21daysago.

Interpretation:Likemostoscillatorsthisisgoodforidentifyingoverboughtandoversoldareas.Puttinglevelsonthisindicator,likemostoscillators,requiresavisualtechniquebecausemostadvancedeclinelinenumbersaremeaninglessbythemselves.Italldependsonwhereyoustartthecalculationthatdeterminesthenumbers(values)thatmakeuptheadvancedeclineline.Chart4-27belowuseszonesat+1000and-1000andtheyseemtoworkverywell.

Chart4-27

GeraldAppellikestousea10-dayrateofchangeoftheadvancedeclinelineand+3000and-3000asthezones.Hestatesthatifitgetsto+5000or+6000itis

goodindicatorormarketstrength.Chart4-28showstheAppelversionwithlinesat-3000,0,+3000,and+6000.Appelalsolikestousea21-dayoscillator,whichisdescribedatthebeginningofthissection.Hementionsthathealsousesthisasadivergenceindicatorwiththemarket.

Chart4-28

AuthorComments:Mostoscillators,especiallythosewithshorttermparameterswillyieldshorttermsignals.TheAdvanceDeclineLineOscillatordoesnotdisappointinthatregard.Ipreferthe21-dayrateofchangeasthesignalsaremoredefined.

Formula:{Cumulated(A-D)-(A-D)inputperiodsago(ROC)}

StockCharts.comSymbol:!BINYADLOand!BINYADLOA

References:

Appel,Gerald,“GeraldAppel,withSystemsandForecasts.”Stocksand

Commodities,Volume12,March1994,pp.98-105.

AbsoluteBreadthIndex

Author/Creator:NormanG.Fosback

Datacomponentsrequired:Advances(A),Declines(D)

Description:ThisindicatorwastermedbyNormanFosbackasa“goingnowhere”indicatorbecauseyoutaketheabsolutevalueofthedifferencebetweenadvancingissuesanddecliningissues.Itdoesnotmatterwhethertherearemoreorlessadvancesordeclines,itistheabsolutedifferencebetweenthemthattheAbsoluteBreadthIndexmeasures.Ittotallydisregardsmarketdirection.Itshowsmarketactivityorlackthereof.

Interpretation:ThethinkingbehindthecreationoftheAbsoluteBreadthIndexisthatwhenthedifferencebetweentheadvancesanddeclinesishigh,thepricechangesarealsobig,which,inturn,canmeanthemarketismorepronetobeingatabottomthanatatop.Thisisanindicationofgoodmarketactivity.Similarly,ifthedifferencebetweentheadvancesanddeclinesissmall(lowAbsoluteBreadthIndexvalues),themarketisnotgoinganywhereandprobablymorenearatop.Thisindicatesalackofactivityinthemarket.Inchart4-29youcaneasilyseethatwhentheAbsoluteBreadthIndexissmoothedby50days,itclearlyispointingoutmarketbottomsandtops.

Chart4-29

AuthorComments:Thisindicatorwasoneoftheearlyones,asismostofFosback’swork.Itisalsooneofthegoodonesandbecauseitseemssosimplistic,manytimesIforgettolookatit.Iprefertosmoothitwith21daysandwatchitasitgoesover1100forbottomsandbelow300formarkettops.Thesearethecurrentsettings.Becausethenumberofissueshasincreasedsomuchinrecentyearstheselevelsneededtobespreadfurtherapart.Youcanseethisinchart4-30.

Chart4-30

Duringthe1970sand1980s,thelevelsthatseemedtoworkbestwere250and600.Thisismerelybecauseoflessissuesbeingtraded.Seechart4-31below.AmorecurrentmethodofusingtheAbsoluteBreadthIndexwouldbetheAbsoluteBreadthIndexadjustedforthetotalissuesthewaysomanyindicatorsfromthepastcanandshouldbeusedthisway.SeeAbsoluteBreadthIndexAdjustedinthischapter.

Chart4-31

Formula:|A–D|

StockCharts.comSymbol:!BINYAB50and!BINYAB21

References:

Fosback,NormanG.StockMarketLogic,FortLauderdale,FL:TheInstituteforEconomicResearch,Inc.,1976.

AbsoluteBreadthIndex-Adjusted

Author/Creator:NormanG.FosbackwasthecreatoroftheoriginalABI.

Datacomponentsrequired:Advances(A),Declines(D),TotalIssues(TI)

Description:TheoriginalversionofthisindicatorwastermedbyFosbackasa“goingnowhere”indicatorbecauseyoutaketheabsolutevalueofthedifferencebetweenadvancingissuesanddecliningissues.Itdoesnotmatterwhetherthere

aremoreadvancesordeclines,itistheabsolutedifferencebetweenthemthatthisindicatormeasures.

Interpretation:ThethinkingbehindthecreationoftheAdjustedAbsoluteBreadthIndexisthatwhenthedifferencebetweentheadvancesanddeclinesishigh,thepricechangesarealsobig,which,inturn,canmeanthemarketismorepronetobeingatabottomthanatatop.Similarly,ifthedifferencebetweentheadvancesanddeclinesissmall(lowAbsoluteBreadthIndexvalues),themarketisnotgoinganywhereandprobablymorenearatop.

AuthorComments:Thisisoneofthoseindicatorsthatneededtobeadjustedbecauseofthelargeincreaseinthenumberofissuedbeingtraded.Aswithmostadjustedindicators,allyouneedtodoiscreatearatio.Inthiscase,justdividebythetotalissuestraded.JustliketheAbsoluteBreadthIndex,Iprefertosmoothitwith21daysandwatchitasitgoesover30forbottomsandbelow10formarkettops.RobertColby,inhisbook“TheEncyclopediaofTechnicalMarketIndicators”furtheradjustedtheformulatomultiplyby100toremovethedecimalvaluesoftheadjustedabsolutebreadthindex.Chart4-32showstheAdjustedAbsoluteBreadthIndex.

Chart4-32

Formula:|A–D|/TI*100

StockCharts.comSymbol:!BINYABIA

References:

Fosback,NormanG.StockMarketLogic,FortLauderdale,FL:TheInstituteforEconomicResearch,Inc.,1976.

Colby,RobertW.TheEncyclopediaofTechnicalMarketIndicators.NewYork:McGraw-Hill,2003.

AdvanceDeclinePower

AlsoKnownAs:ADPower

Author/Creator:JohnMcGinley/JoeGranville

Datacomponentsrequired:Advances(A),Declines(D),MarketIndex(MKT).

Description:Originallybaseduponweeklydata,thisisthedifferencebetweenadvancesanddeclinesdividedbytheabsolutechangeintheDowJonesIndustrialaverage.

Interpretation:Originally,theconceptwastoidentifyrelativestrengthbetweenthebroadmarket(advancesanddeclines)andtheDowIndustrialaverage(themarket).Chart4-33isthedailyADPowerwitha21-daysmoothing.

Chart4-33

AuthorComments:Bytakingaratiooftheadvancedeclinedifferenceandthe

absolutechangeintheDowIndustrials,thisindicatorisrelatingtomomentumoraccelerationvalues.Itcertainlyappearsthatthisindicatorisgoodforidentifyingsignificantmarketbottoms.Whileitseemstoreflectmanymarkettopsbyitsdownwardspikes,itissomewhatmanyoftheeconomicindicatorsthatareinusetodaywheretheyidentifytwelveofthelasteightrecessions.Inkeepingwiththeoriginalformula,chart4-33bshowstheADPowerindexusingweeklydata.Youcanseethatthereisn’tthatmuchdifferencewiththedailyversion.

Chart4-33b

Formula:(A–D)/|MKT–MKT(52weeksago)|

StockCharts.comSymbol:!BINYMADPand!BINYMADPW

References:

McGinley,John,TechnicalTrends,Wilton,Ct.

CoppockBreadthIndicator

Author/Creator:EdwinSedgwickChittendenCoppock

Datacomponentsrequired:Advances(A),Declines(D),TotalIssues(TI).

Description:Thisindicator,createdintheearly1960s,usesanadjustedadvancedeclinelineasitsbasis.Subtractthedeclinesfromtheadvancesanddividethatdifferencebythetotalissuestraded.Thencalculateacumulativetotalasyouwouldwiththeadvancedeclineline.Asecondlineiscalculatedasaweightedmovingaverageoftherawcumulatedline.Originallydevelopedasaweeklyindicator,theCoppockBreadthIndicatorcanalsobeadaptedtodailybreadthdata.

Interpretation:Coppock’sinterpretationwassimple;whenthecumulativelinecrosseditsown15weekweightedmovingaverageasignalwasgenerated.Mosttimes,itisthesimpleconceptsthatseemtoworkthebest.Chart4-34usesdailydataadjustedtoa75dayweightedsmoothinsteadofthe15-weekversion.Whenthemiddleplotisequalto10,theadvancedeclinelineisaboveitsweightedmovingaverage.Whenitisat-10,itisbelowtheaverage.

Chart4-34

AuthorComments:SedgeCoppockwasasinterestinginpersonaswerehisearlystockmarketinnovations.MostarefamiliarwithhisCoppockCurve,notthenamehegaveit,butonethatisgenerallyacceptedinthetrade.HecalledittheTrendexVeryLongTermRiskIndexforListedStocks.Itwasan11and14-monthpercentagechangeoftheDowJonesIndustrialAverageaddedtogetherandthena10monthweightedmovingaverageofthat.Hewasonceaskedwhyhepicked11and14monthsforthisindicator.Hesaidanundertakerfriendtoldhimthattheperiodoftimeforagrievingfamilyafterthedeathofaclosefamilymemberwasusuallybetween11and14months.

IhadthepleasureofmeetingSedgeCoppockin1988attheMarketTechnician’sAssociation(MTA)conferencewherehewasawardedtheMTA’sannualawardforcontributiontothefieldoftechnicalanalysis.Priortothat,IhadafewcommunicationswithhiminregardtoalocalgroupofanalystsinDallas,Texas,thatIwasworkingwith.Hesentusatapeabouthisbeliefsandobservationsof

almost40+yearsinthestockmarket.Hedidnotholdbackanypunchesinregardtouninformedinvestors,thosewhoarealwayslookingforthequickwaytoprofits,andhowmostwillnotdotheworkrequiredtomakeitinthemarkets.Thattape,andthreemonographsthathewrotearesomeofthebestinvestmentadviceonecouldeverget.

Formula:PreviousValue+(A–D)/TI

StockCharts.comSymbol:!BINYCBID

References:

Coppock,E.S.C.,1977,“Low-RiskInvesting,”TrendexResearchCorp,SanAntonio.

Coppock,E.S.C.,“EmotionsMakePrices,”TrendexResearchCorp,SanAntonio.

Coppock,E.S.C.,“RealisticStockMarketSpeculation,”TrendexResearchCorp,SanAntonio.

HaurlanIndex

Author/Creator:P.N.(Pete)HaurlanandDavidHolt

Datacomponentsrequired:Advances(A),Declines(D).

Description:TheHaurlanIndexisanexponentialmovingaverageoftheadvancesminusthedeclines.Therearethreevariationsforshort,intermediate,andlongtermanalysis.

Interpretation:Allthreeversionsgivebuysignalsasitcrossesfrombelowthezerolinetoaboveit.Sellsignalsarewhenitgoesfromabovetobelowthezeroline.PaulCarrollassignedthefollowingbuyandsellzoneswhichseemtoworkwell:ShortTermHaurlanIndex(3daysmooth):-550forbuyand+550forsell.

IntermediateTermHaurlanIndex(20daysmooth):-200forbuyand+200forsell.

LongTermHaurlanIndex(200daysmooth):hesuggestsusingtrendlines.

GeraldAppelalsoclaimsthattheseareidealfortrendlineanalysis,particularlywiththeshortandintermediateversions.AppelalsoagreeswithCarrollthat-550and+550fortheshortversionindicatetheimmediacyofashorttermmarketreversalorconsolidation.Chart4-35showstheshorttermversionoftheHaurlanIndexwiththethresholdsusedbyCarrollandAppel.

Chart4-35

Chart4-36istheintermediatetermHaurlanIndexshowingthe+200and-200thresholds.

Chart4-36

Chart4-37isthelongtermHaurlanIndexwithacoupleoftrendlinebreaksidentifyingmarketturns.

Chart4-37

AuthorComments:Thisisanothertwistontheadvancedeclinedifference.Someofthebestindicatorsarealsothesimplestones.PeteHaurlanwasatruerocketscientistwhoworkedfortheJetPropulsionLaboratory.Hismarketinterestandcontributionstothefieldwereunderhisadvisoryfirm,TradeLevels.

Formula:PreviousValue+(A–D)

StockCharts.comSymbol:$NYAD

References:

Haurlan,P.J.,TradeLevels,Inc.Pasadena,CA.

Carroll,PaulE.,“TheHaurlanIndex.”Stocks&Commodities,Volume12,January,1994,pp.23-25.

Appel,Gerald.WinningMarketSystems.Greenville:TradersPress,1973.

McClellanOscillator

Author/Creator:ShermanandMarianMcClellan

Datacomponentsrequired:Advances(A),Declines(D).

Description:TheMcClellanOscillatoristhedifferencebetweenthe19-day(10%trend)andthe39-day(5%trend)exponentialmovingaveragesofthedailynetadvancesminusdeclinesfigure.Thesetwosmoothingvalueswereusedbecausetheyreflectthetwomostdominantshorttointermediatecyclesinthemarket.Thesetwoexponentialaveragesalsowerechoseninordertooptimizespeedingeneratingadirectionalsignal,whileminimizingwhipsaws.Theoscillatortendstoleadthemarketbecauseitwillindicateoverboughtandoversoldsituationspriortothemarket.Itwillpassthroughzeroatorverysoonafteranimportantmarketturningpoint.

Interpretation:TheMcClellanOscillatorisanintermediatetermindicator,butitcanbeusedforshortertermtimingwhenitbottomsinoversoldareassuchas-100andbelow.Usually,McClellanOscillatorcrossingsabovethezerolinearepositive/bullishandbelowthezerolinearenegative/bearish.Readingsabove+100areoverboughtreadings,whilebelow–100areoversold.The+130and-130levelsarealsoimportant.Whentheoscillatordropsto-130andthenrallies,quiteoftentherallywillfailandgiveagoodsellsignal.Theoppositeoccurswhentheoscillatorrisesto+130.Verynegativereadingsinthe-150areaareconsideredassellingclimaxlevels.AnothercomponentoftheMcClellanOscillatorisdivergentpatternformationscomparedtothemarket,inparticular,atripletopformationoftheoscillator.In“PatternsforProfit,”thereisalsomentionofusingstandardtrendlineanalysiswiththeoscillator.Thatbookfurthermentionsastrong22-24weekcycleappearsintheoscillator,andthatwastrueatthetimethebookwaswritten.ThiscyclenolongerappearsinthepatternsoftheOscillator,anditlikelydisappearedduetochangesinU.S.taxlawsrelatedtoholdingperiodsfordeterminationofcapitalgainstaxes.Chart4-38showstheMcClellanOscillatorandthe+150and-150thresholdsmentionedabove.

Chart4-38

AuthorComments:Exponentialmovingaveragesandpercentageoftrendsmoothingareconfusingtomost.Theyreallyareequalotherthansmallroundingdifferences.A19periodexponentialaverageisthesameasa10%trendsmoothing.Oneneedstobecautioustoavoidrelyingondataandresultsatthebeginningofthedatafileinordertolettheindicatorsadjusttoreflectrecentdatavalue.Seetheadditionalinformationinchapter10(TheMcClellanIndicators)forthemathematicaldetails.

TheMcClellanindicatorsutilizetheadvancedeclinelineconcept.Apointoftennotunderstoodabouttheadvancedeclinelineisthatitsnumericalvaluehasnomeaning,sincedifferentstartpointsintheA-DdatawillresultindifferentnumericalvaluesforthesumofallpreviousA-Dreadings.TheA-DLine’srelativepositiontopaststructurescanhaveimportance,suchasmakingahigherhighoradivergencerelativetoprices.OfevengreaterimportanceistheA-DLine’sacceleration,bothupanddown.ThisiswhytheMcClellanindicatorsare

suchasignificantcontributiontobreadthanalysis.

ShermanMcClellan,inaninterviewinStocks&Commoditiesmagazine,in1994,saidthatMcClellanOscillatorreadingsintheneighborhoodof-125to-130representedabearishindication.Areadingthatloworlowerthatarisesafteraprolongedperiodwithoutdeeplynegativereadingsmeansthemarketisbecomingilliquid.Ineffect,itcanbeawarningshotoflargerproblemstocome.Asubsequentdeeplynegativereadingdoesnothavethesame“warningshot”implications;itisinsteadthefulfillmentofwhatthewarningshotwaspredicting.

WemakementionhereofnumericalvaluesfortheOscillator,butreadersareurgednottofocussocloselyonthenumber.Varyingamountsofmarketvolatilitycanaffectamplitudes,andsoanalysisisbetterdonebyexaminingachartoftheOscillator’spathratherthanbylookingatasinglenumericalvalueanddrawingconclusionsfromthat.Achartwillrevealwhatlevelshavemarkedrecentextremes,andwillalsoallowtheanalysttospotOscillatorstructureswhichhaveinterpretivesignificance,suchascomplexorsimplestructuresanddivergencesrelativetopriceaction.

WhentheOscillatorcrossesthroughthezerolineinonedirection,andthenmakesadirectturnaroundtoheadbackacrosszerointheotherdirection,thatisasignofweaknessforthatsideofthezeroline.If,however,theOscillatorbuildsa“complex”structureononesideofthezeroline,doingalotofchoppingupanddownwithoutcrossingzero,thenthatimpliesstrengthforthatside.Acomplexstructureabovezeroimpliesthatthebullshavecontrol,andalthoughthebearsmightsummonenoughenergyforamomentarydownwardcorrection,furthergainsshouldbeexpected.Occasionallyperiodswilloccurinwhichneithersideofzerowillseeacomplexstructure;theOscillatormayjustgofromasimplestructureabovezerotoasimplestructurebelowzeroandbackagain,meaningthatneithersidehaswillingnessorabilitytotakecontrolofthemarket.

ThehistoryofhowShermanandMarianMcClellandevelopedtheOscillatorandSummationIndexisrichintechnicalanalysishistoryanddevelopment.ItbeginswithcontactfromGeneMorgan,whohosted“ChartingtheMarket”onKWHYtelevisioninthe1960sandwhogavetheindicatorstheirnames.KennedyGammagecomesintothepicture,asdoesPeteHaurlan.ThesinglebestaccountingonthiswasdonebyShermanMcClellanattheMarketTechnician’sAssociationmeetingonMay14,2004,whenhewasawardedtheLifetimeAchievementAward.Hisson,Tomprovidesthispresentationand

Sherman’sacceptancespeechontheirsite.Goto:http://www.mcoscillator.com/user/MTAspeech.pdf.TomalsowaskindenoughtoaddcommentsonthissectionandthesectionontheMcClellanSummationIndex.

_______________________________________________

MygoodfriendTomMcClellanhasofferedthebelowpieceforinclusioninthebook.

WehavelearnedalotaboutthebehavioroftheMcClellanA-DOscillatorsincemyparents,ShermanandMarianMcClellan,broughtittothepublicbackin1969.Oneofthepointsthatwehavelearnedisthattheproperwaytointerpretitdependsonthemarketenvironmentyouareinatanygivenmoment.

IfIweretodistillallofthecollectedwisdomabouttheMcClellanOscillatorintosimplesoundbites,Iwouldhavetobreakitdownaccordingtolevelsofunderstandingofthecomplexmessagesitcanconvey.Sohere,indegreesofincreasingsophistication,aretheimportantpoints:McClellanOscillator101–Positiveisgood,negativeisbad.

McClellanOscillator201–Overboughtandoversoldreadingsareimportant,asaredivergences,althoughtheycansometimesbemisleading.

McClellanOscillator301–Complexstructuresaboveorbelowzeroconveyan

importantmessageaboutwhichside,bullsorbears,isincontrol.Conversely,simpleacross-and-backstructuresimplyalackofcontrol.

GraduateLevel–HowoneshouldinterprettheMcClellanOscillatorisdependentonwhetherthestockmarketisinanuptrendoradowntrend.

Nowsomeexplanation,asItrytobringyoualluptothegraduatelevelinonefellswoop.Whenthestockmarketisinanuptrend,ifyouseetheMcClellanA-DOscillatorriseuptoalevelabove+150,andthehigherthebetter,itisasignofstrongupwardinitiationandapromiseofevenhigherhighstofollow.Yes,itisanoverboughtcondition,butanoverboughtreadinginanuptrendisnotaterminaleventasoneisinadowntrend.

WesawanexampleofthatbackinOctober2014,attheleftendofthechartabove,whentheOscillatorclimbeduptoahighof+271,andstayedatahighlevelforalongtime.ItwasamessagethattheworriesovertheEbolaPanicweredone,andthattherewasstillplentyofliquidityavailabletohelplifttheoverallstockmarket.

Subsequentrallieswerenotquiteasstrong,andwedidnotseeanysubsequentinstancesofstronglypositiveOscillatorreadings.ThefinalpricehighinMay2015camewiththeMcClellanA-DOscillatoratapeakreadingofonly+51,showingthetepidstrengthintheliquiditystream.

Nowweareinadowntrend,andthecountertrendrallieshavebeenabletotaketheOscillatoruptoalevelwhichwouldotherwisebeanindicationofstrongnewupwardinitiation.Butthelackoffollowthroughrevealsthosehighreadingstobemarkersofblowofftopsinsteadofstrongnewinitiation.ThelatestOscillatorpeakroseallthewayupto+303,andwethusfararenotseeingfollow-through.

IftheOscillatorcontinuesfallingandgoesbackdownthroughthezerolinewithoutbuildinganycomplexityupabovezero,thenthatwillbea“tell”thattherecentbouncehasbeenjustacountertrendrally,andisnotthestartofanewuptrend.ThatistheoutcomewhichIexpecttosee,andsotheOscillatorservesasagreattoolforconfirmationofexpectations.

Asanhistoricalexampleofthisprinciple,thisnextchartlooksbackattheperiodfrom2008to2009.

Duringthewholeofthebearmarketin2008,wesawseveralinstancesoftheMcClellanA-DOscillatorrisinguptoveryhighlevels,notjustabove+150butupwellabove+200.Andineachcase,itmarkedtheendofacountertrendrallyratherthantheinitiationofanewuptrend.ItwasnotuntilwegotpastthefinalbottominMarch2009thatthemeaningoftheveryhighOscillatorreadingsstartedtochange.EachsubsequentinstanceofaveryhighOscillatorreadingmarkedanotherbullishwaveofupwardinitiation.

Ifonehadbeenlookingatthesereadingsinrealtime,itmighthavebeenhardtoknowthatthereallyhighreadingsinlateMarch2009weresomehowdifferentthantheonesallduring2008.SoifonehadonlytheMcClellanOscillatorasatool,thenitwouldhavebeenpossibletomakeaninitialmisinterpretationofthesurgehigherinMarch2009,thinkingthatitwasjustanothercountertrendrally.ButthetellinthatcasewasthattheOscillatorremainedatahighlevellongerthaninallofthecountertrendralliesof2008,andthemarketrefusedtostopgoingup.Atsomepointanhonestanalystwouldhavetochangehisviewandacceptthattherehadbeenasea-change.

That’seasyformetosaynow,anditwouldhavebeenhardtodoinrealtimeasitwashappeningbackthen,Iknow.ButthisservesasagoodlessonforusalltorememberasweseektoproperlyinterpretwhatweseeintheOscillatorandinthemarketgoingforwardfromhere.

Bythat,Imeanthatifthe+303McClellanOscillatorreadingonOct.8isfollowedbyapromptdownturnandnofurtherupwardmovement,itwillbea

tellthatwehavejustseenyetanothercountertrendrallywithinwhatissupposedtobeadowntrendlastinguntilatleastApril2016.Butif,instead,theOscillatorstaysabovezerolongenoughtopushtheRatioAdjustedSummationIndexabove+500,thenthatwillbeanentirelydifferentmessage.

IfyouwanttolearnmoreabouttheMcClellanOscillatorandhowtointerpretit,startwithourLearningCenterarticleswhicharefreeforeveryone.ThenconsiderorderingourAdvancedTopicsSeminarvideo,whichfeatureslessonsonhowtointerprettheMcClellanOscillatorplusawholelotmore.AndifyouwouldliketoorderaneweBook-formatcopyofShermanandMarianMcClellan’soriginal1970book,PatternsForProfit,visitourBooksandDVDspage.

ManythanksTom.

_______________________________________________

MoredetailsontheMcClellanIndicatorscanbefoundinChapter10.

Formula:(Today’s19exp.averageof(A–D)–(Today’s39exp.averageof(A–D)

StockCharts.comSymbol:$NYMOT

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

McClellanSummationIndex

Author/Creator:ShermanandMarianMcClellan

Datacomponentsrequired:Advances(A),Declines(D).

Description:TheMcClellanSummationIndexisthecumulativesumofalldailyMcClellanOscillatorreadings,andprovidesalong-rangeviewofmarketbreadth.TheSummationIndexthereforechangeseachdaybythevalueoftheOscillator,risingwhentheOscillatorispositiveanddecliningwhentheOscillatorisnegative.TheSummationIndexhasdevelopedalifeofitsownastimehasaddedadditionalinformationtoitsinterpretation.Originally(inthe1960-70s)thesummationindexmovedintherangeof+1000and-1500.SincetheOscillatorandSummationIndexdebutedbeforethedayswhencomputersorevenhand-heldcalculatorswereavailable,allcalculationsweredonemanually.Sothatfolkswouldnothavetoworkwithnegativenumbersexceptunderveryunusual(andimportant)circumstances,theMcClellansarbitrarilysetaneutrallevelat+1000.Thiswasdonebyadding1000tothecalculation.Sincetheadventofpersonalcomputersthisisnolongernecessary,butisalsonoteasilychangedsincesomuchiswrittenaboutitandsomanyfolksfollowit.TomMcClellan(ShermanandMarian’sson)toldmeitwasnotworththepossibleconfusiontochangeit.

Interpretation:AbasicmathematicalfactisthatwhentheMcClellanOscillatorispositive(abovethezeroline),theMcClellanSummationIndexwillberising.ThelevelsoftheSummationindexareasimportantasthedirection.Chart4-39showstheMcClellanSummationIndexbackto1997.

Chart4-39

AuthorComments:Thisisprobablyoneofthebestbreadthindicatorsavailable.Ithasamultitudeofuses.Notonlyitsdirection,butthelevelitisatisimportant.ItisdiscussedhereinkeepingwiththeconventionsusedinthisbookandisfurtherelaboratedoninChapter10.

TheMcClellanSummationIndexhasanumberofdifferentcalculations.Theonethatisusedbythemostanalysts,isprobablyalsotheonethatisnotasgoodasatleastoneoftheothers.Theuseofexponentialmovingaverages(percentoftrend)forcalculatingthesummationindexiscommonandactuallyhowtheMcClellansoriginallydidit.However,intheearly1990s,abrightmathematiciannamedJamesR.MiekkacameupwithamodificationtotheMcClellanformulathatistodayusedbytheMcClellans,CarlSwenlin,andmostoftheotherpuristsinthefield.Whilethismodificationdoesnotaffecttheoscillator,itdoeshaveasignificanteffectonthesummationindexwhichisderivedfromtheoscillator.

Oneoftheproblemswiththeoriginalformulawasthatasthesummationindexlevelswerefoundtoalsobeimportant,itwasdifficultfortwodifferentanalyststohaveexactlythesamevalues.Ifbreadthvaluesfromdifferentsourceswereused,ifmatherrorswerepresent,orifanyday’sdataweremissinganywhereinthecalculation,thenthosedifferenceswouldaccumulateandremainintheSummationIndexvaluesforever.

MiekkafoundthattheSummationIndexcouldbecalculatedforanydayinhistory,simplybyknowingthatday’svaluesforthe10%trendand5%trend.Hecreatedacalibrationformulasothatthelevelswillremainthesamenomatterwhenyoubeginthecalculation,andanydataorcalculationerrorswouldeventuallybefactoredoutoftheSummationIndexvaluejustastheyarefactoredoutofthe10%trendand5%trend.ThemathematicsofMiekka’scalculationformulacanbefoundinChapter10.Inaddition,JimMiekkahasofferedaMcClellanSummationBuySignalreport,alsofoundinChapter10.

Intheirvastresearchontheirindicators,theMcClellansfoundthatwhentheSummationIndexwentabove+3000,itwastimetopayattention.Thefirstobservationwasthatwheneverthathappened,astrongbullmarketwasnearby.Fromtheearly1970suntil1994(timeoftheirinterview),therewereseveninstancesofthesummationindexbreaching+3000.Fromthechartbelow,youcanseethesesevenplustheonesinmorerecenthistory.Theriseto+6000inApril,2003wasalsotelling.Lookingatthesamechart,itisalsoapparentthatwhentheMcClellanSummationIndexreachesadeeplynegativevalueonthedownside,animportantbottomiscloseathand.Chart4-40showstheMcClellanSummationIndexusingtheMiekkaformulaadjustment(seechapter10formoredetails)withthe+3000and-1200thresholds.

StockCharts.comSymbol:!BINYMSIM

Chart4-40

CarlSwenlinandtheMcClellansalsouseanadjustedadvancedeclineformulainassociationwiththeMiekkamodification.ThisisanattempttosomewhatneutralizethegrowingeffectoftheadvancedeclineinformationontheNewYorkexchange.Theratiousedis(A–D)/(A+D).Oftenafactorof1000isusedtomovethenumbersfromoutoftherealmoffractionsandintothemorenormaltypenumbers.Chart4-41showstheMcClellanSummationIndexusingtheratioandtheMiekkaformulaadjustmentandistheversionusedbyCarlSwenlintheMcClellanstoday.

StockCharts.comSymbol:!BINYMSIS

Chart4-41

TomMcClellansaysthatwhentheMcClellanSummationIndexdropsbelowthezeroline,itisaprecursorforabearmarket.Atmuchdeeperlevels,theSummationIndexcanrevealwhenenoughofadeclinehastakenplace,andwhentradersshouldbegintolookforastrongupmoveoutofthatdeepbottom.Asthemarketmovesupoutofadeeplyoversoldbottom,theSummationIndexcomesintoplayagainwheniteitherconfirmsorrefutesthestrengthofthenewupmove.Amovefromadeeplyoversoldleveltoaveryhighlevelwithina5-monthperiodcanconfirmthatanewbullmarkethasbeenestablished.FailuretoachieveahighenoughSummationIndexreadingafterabearmarketdeclinecanrevealthatthebearsarestillincontrol,andthepricelowneedstoberetestedorexceededtothedownside.

AnotheranalysismethodtheMcClellansusedwastooverlaypastsummationindexchartsbaseduponsignificantmarketbottomsorlowsummationreadings.Thistechniquehelpstoanticipatemarketmovements.

MartinPringclaimsthatusingtheSummationIndexwitha35-daysimplemovingaveragecrossoveroffersgoodresults.Healsostatesthatusingnormaltrendlineanalysisonthesummationindexcanleadtochangesinmarketdirection.Chart4-42showsPring’suseoftheMcClellanSummationIndexwitha35daymovingaverage.

Chart4-42

Formula:ThisistheaccumulationoftheMcClellanOscillator.SItoday=SIyesterday+McOtoday

StockCharts.comSymbol:$NYSIT

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

Pring,Martin,“InternalMarketMomentum.”StocksandCommodities,Volume11,July1993,pp.298-305.

Miekka,James,TheSudburyBullandBearReport,St.Petersburg,FL.

MerrimanBreadthModel

Author/Creator:PaulMerriman

Datacomponentsrequired:Advances(A),Declines(D),MarketIndex(MKT)

Description:ThisindicatorusestheadvancedeclinelineandtheNewYorkCompositeIndex.Itutilizesarelationshipbetweenthetwoinamannernotascomplexastheadvancedeclinedivergenceoscillator,onethatiseffective.

Interpretation:Abuysignalisgivenwhentheadvancedeclinelineis2%ormoreaboveis150daymovingaverageandwhentheindexis2%ormoreaboveits150daymovingaverage.Asellsignalisgivenwhentheadvancedeclinelineis2%ormorebelowits150daymovingaverageortheindexis2%ormorebelowits150daymovingaverage.Inchart4-43abuysignaliswhentheindicatorisat+1andasellsignaliswhenitisat-1.Multiplesignalsshouldbeignored.

Chart4-43

AuthorComments:Thisisasimplebutquitegoodconcept.Itoffersdoubleconfirmationinordertogetintothemarketwhereonlyoneofthetwocomponentscangetyouout.I’mnotsurehowhemeasuresthepercentagesbecausethenumericalvaluesoftheadvancedeclinelinecangetquitelargedependinguponwherethecalculationwasstarted.However,ifheislookingatthepercentagerelativetoamovingaverageofthesamevalues,sothiswouldself-adjustovertime.

StockCharts.comSymbol:!BINYMBMD

References:

Merriman,Paul,www.fundadvice.com/modelsexplained.html.

SwenlinITBreadthMomentumOscillator

Alsoknownas:ITBM

Author/Creator:CarlSwenlin

Datacomponentsrequired:Advances(A),Declines(D).

Description:TheIntermediateTermBreadthMomentumOscillatorisabarometerofbreadth.TocalculatetheITBM,addthedailyMcClellanOscillator(ratioadjusted)tothedaily39-dayexponentialaverage,thencalculatea20-dayexponentialaverageoftheresult.

Interpretation:Carloffersthisshortbitofadviceonhisindicator:Itisbetterifthisindicatorisabovethezerolineandrising.Belowthezerolineandfallingistheworstscenario.Risingisbetterthanfalling,evenifbelowthezeroline.Abovethezerolineandrisingisbest.Theabsolutevalueindicateshowoverbought/oversoldthemarketis.Directionismostimportantbecauseitindicateswhetherthemarketisgettingstronger(rising)orweaker(falling).ThebestconditionisfortheITBMtoberisingaboveits10-EMA(exponentialmovingaverage),andtheworstisfallingbelowits10-EMA.ItisextremelynegativeiftheITBMtopsbelowits10-EMAandbelowthezeroline.Chart4-44showstheSwenlinITBreadthMomentumOscillator.

Chart4-44

AuthorComments:CarlSwenlin’swebsiteatwww.decisionpoint.comissomethingtechnicalanalystsshouldnotmiss.Carlhascreatedanumberofbreadth-basedindicatorsovertheyears.CarlusesthedifferenceofadvancesanddeclinesdividedbythesumofthemforhisratioadjustedversionoftheMcClellanformula.Withthisindicator,hewantedtodevelopitsothatitwouldincorporateboththeMcClellanOscillatoranditscomponents.Carl’sversioncertainlyletsyouknowwhentotakenegativereadingsseriously.

2015Update:DecisionPointhasbeencompletelyincorporatedintoStockCharts.com.

Formula:TocalculatetheITBMaddthedailyMcClellanOscillator(Ratio-Adjusted)tothedaily10%exponentialaverage(Ratio-Adjusted),thencalculatea20-dayexponentialaverage(0.10exponent)oftheresult.

StockCharts.comSymbol:!STOBNYA

References:

Swenlin,Carl,www.decisionpoint.com,nowwww.stockcharts.comMcClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976

SwenlinTradingOscillator–Breadth

Alsoknownas:STO-B

Author/Creator:CarlSwenlin

Datacomponentsrequired:Advances(A),Declines(D)

Description:TheSwenlinTradingOscillator–Breadthwasdesignedforshort-termtrading.Itisa5-daysimplemovingaverageofa4-dayexponentialaverageofthedailyadvancesminusdeclinesdividedbythetotaldailyadvancesanddeclinestimes1000.ThisistheratiothatiscommoninSwenlin’swork.

Interpretation:Thedoublesmoothingoftheshort-termdataresultsinareliableoscillatorthatpersistsinonedirection,usuallytopsnearshort-termmarkettops,andbottomsnearshort-termmarketbottoms.Aswithmostindicators,theprimarytrendofthemarketwilldeterminehowyouwillusetheindicator.Inabullmarket,thetopswillnotbeveryreliable.Inabearmarket,thebottomswillnotbeveryreliable.Theindicatorisshowninchart4-45.

Chart4-45

AuthorComments:CarlSwenlinhascreatedagoodtradingvehiclewithhisSwenlinTradingOscillator.

Formula:TheSTOisa5-daysimplemovingaverageofa4-dayexponentialmovingaverageofthedailyadvancesminusdeclinesdividedbythetotaldailyadvancesanddeclinestimes1000.(A-D)/(A+D)*1000.Firstyoumustcalculatetheaveragevalueof(A-D)/(A+D)*1000forthelastfourdaysbeforeyoucanbegintheexponentialweighting.Nextyoucanbegincalculatingtheexponentialaverage.Thefollowingisakeyforthesymbolsintheformula.pdEMA=PriorDay'sAverage(BeginwithsimpleMA,thereafterpdEMAisanexponentialaverage.)(A-D)/(A+D)*1000=Currentday'sadvancesminusdeclinesdividedbythetotaladvancesanddeclinestimes1000.TheformulafortheEMAis:((A-D)/(A+D)*1000)*0.5)+pdEMAAllthatremainsistocalculatea5-daysimplemovingaverageoftheEMA.

StockCharts.comSymbol:!STOBNYA

References:

Swenlin,Carl,www.decisionpoint.com,nowwww.stockcharts.comZahorchakMethod

Author/Creator:MichaelG.Zahorchak

Datacomponentsrequired:Advances(A),Declines(D),MarketIndex(MKT).

Description:Inhis1977book,TheArtofLowRiskInvesting,MichaelZahorchaklaysoutacompleteinvestingandanalysisplanusingmovingaveragesontheNewYorkCompositeIndexandtheadvancedeclineline.Zahorchak,whowasassistantvice-presidentoftheAmericanStockExchange,developedthismethodologyusingonlyweeklydata.Basicallyyoumustmaintaina5,15,and40weekmovingaverageontheadvancedeclineline,theNewYorkcompositeindex(ZahorchakusedtheDowIndustrialAverage),andanystocksthatyouwishtoanalyzeandinvestin.

Interpretation:Zahorchakdefineshowtomovefromadowntrendtoanuptrendandalsotalksaboutperiodsofindecision.Basically,whentheadvancedeclinelineandthemarketaveragearebothabovetheir40week(200day)movingaverages,themarketisinanuptrend.Identificationofamarkettopiswhenacombinationofthe5and15periodaveragesbegintobreakdown.Similarly,abottomoccurswhentheystarttorise.Thechartbelowwasdevelopedusingdailydata,substitutingtheappropriatenumberofdaysfortheweeksusedbyZahorchak(15weeks=75days).Dailydatahasmoreoscillations,butthemethodworksjustthesame.

Theindicatorinchart4-46isscaledfrom-15to+15.Asvariouscomponentsofthismethodtakeaffecttheindicatorrisesorfallsbaseduponthesumofallofitscomponents.Themostbullishis+15andthemostbearishis-15.Usingthezero-linecrossingforsignalsseemstoworkwell.Onecouldalsodevelopmoreextravagantsignalsusingvariouslevelstoenhancethetiming.Alwayskeepinmindthatthiswasalongtermapproachtoidentifyingtrendsandisnotfortrading.

Chart4-46

AuthorComments:Thiswasoneofthefirstbooksthatcementedmythinkingintotakingatechnicalapproachtoinvestingandmarketanalysis.Itisashamethebookisoutofprint,becauseZahorchakcoversallthebasicsfromemotions,toWallStreetmyths,tohowtocontrolalltheoutsideinfluencesthatcancauseyoutomakebaddecisionsinthemarket.IwoulddothismethodinjusticeifIdidnotincludethesignalsusingweeklydata.Ontheweeklychart(chart4-47)onecanseethatwhenevertheindicatorisabove+8,themarketisrisingandwhenbelow-8itisnot.Noteworthy,isthefactthattheindicatordroppedto+4thefirstweekinOctober,1987.Thisisagoodmethodologyforkeepingyourselfontherightsideofthemarket.Itisnotfortrading.

Chart4-47

DetailsontheZahorchakMeasure

Let’sstartoffwithareviewoftheZahorchakMeasureinconsiderabledetail.Zahorchakstatesthatthereisoftennocorrelationbetweenthepriceofastockanditsfundamentals.Hefurtherstatesthatfundamentalswilltellyouwhetherornotinvestorswillbeattractedtoastock.Zahorchakclearlybelievesthatthemarketsmoveregularlyfrombullmarketperiodstobearmarketperiods.Theseswitchesfrombeartobullandbackagainarenotduetoeconomicconditionsbutaswitchininvestorpsychologyfromoptimismtopessimism.Healsobelievesthatstocksmoveinherdsandhaveatendencytogoupanddowntogetherinthesebullandbearmarkets,withjustenoughexceptionstoprovetherule.Hewasreallybigonspendinglotsoftimeonselectingashoppinglistofstocksaspotentialpurchases;nolessthan25andnomorethan100.Hepreferredcyclicalstocksthatmovedwellwithbullandbearperiods.

“Onlythemarketitselfcantellyouwhattodo.Everythingelseisirrelevant.Whiletheirrelevantitemstellyouwhatthemarketoughttobedoing,thismayormaynotbewhatitactuallyisdoing.”Todeterminewhatthemarketisdoingcomputethefollowing:1-5weekmovingaverageoftheDowIndustrials

2–15weekmovingaverageoftheDowIndustrials

3–40weekmovingaverageoftheDowIndustrials

4–15weekmovingaverageoftheNYSEadvancedeclineline.

Note:RereadingthebookforthisarticleIrealizedatsomepointinthelast4decadesIhadswitchedtousingtheNYSECompositeaverageinsteadoftheDowIndustrials.IthinkitwasbecausetheadvancedeclinelineusestheNYSEstocks,sofiguredusingtheindexofthosestocksmademoresense.Iseriouslydoubtitmakesadifference.

Zahorchakthendiscussesthetimingofthemarketbecausetheprimarytrendtellsyouwhentobuystocksandwhentoavoidthem,however,itdoesnottellyouwhentosellthem.Oncestockshavebeenbought,theirtrendactiontellsyouwhentosell.Note:Keywordhereis‘their.’Hethengoesintothefourbasicmarketconditions.

1–Bullmarket.

2–Sidewaysperiodsinabullmarket.Hegoesintoconsiderablediscussiononwhyinvestorsmaketerribledecisionduringthesetypesofmarkets.

3–Bearmarket.

4–Again,anuncertainperiodwithinabearmarket.Again,muchdiscussionaboutallthemistakesinvestorsmakeduringthisperiod.

Inthetable4-1below,+40or–40meanthatthepriceisabove(+)orbelow(-)the40-weekaverage.Upmeansthemovingaverageismovinghighereachweek.Downmeansthemovingaverageismovinglower.

Table4-1

ThetimingofthepurchaseandsaleofindividualstocksisprovidedinTable4-2.TheADLineisnotusedheresincethereisnoadvancedeclineinformationonanindividualstock.

Table4-2

2015Update.WhenwewereconvertingtheZahorchakMeasureintoStockCharts.com’ssymbolcatalog,wehadadifficulttimebecauseIhadtinkeredwiththeoriginalformulatryingtoimproveit.IfinallygotthecorrectformulatakencareofbutwanttoaddtheZM2versionforboththeweeklyanddailyZahorchakMeasure.WhenBillShelbyandIstartedtoprogramtheZahorchakMeasureintoStockCharts.com’sformatsoitwouldbeincludedinthesymbolcatalog,wehadtroublegettingstarted.ThereasonwasactuallymyfadingmemoryasIhadtinkeredwiththeZahorchakMeasureoverthedecadesandintheprocessthoughtIhadmadeafewchangesandimproveditsomewhat.OnceIrealizedIwasgivingBillthecodetothe“tinkered”versionandsenthimthecorrectcodewewereoffandrunning.AfterreviewingbothsetsofcodeIdecidedtoalsoincludemyalternateversion.

Ihadnoticedthatduringmarketbottomsandespeciallytopstherewasalotofnoiseinthemeasure;whileitstillyieldingreasonablesignals.Thisgenerallyhappenswhenashorttermaverageisdancingwithalongtermaverage,whichinthiscaseisthe5weekversusthe40week.SoIsimplyremovedthebuyandsellrequirementsforthosetworelationshipsanditremovedmuchofthenoisewithoutaffectingthetimeliness.Chart4-48belowshowstheweeklymodifiedZMforthepast35years.Youmightnoticethatwiththe5/40relationshipremovedtheZMnowonlymovesfrom+10to-10.Chart4-49showstheweeklymodifiedZMforlast10years.

Chart4-48

Chart4-49

SinceImodifiedtheweeklywewentaheadanddidthesamethingforthedailyversion.Chart4-50showsthedailyalternateZMforthepast10years.

Chart4-50

Formula:∑(A–D)weekly

StockCharts.comSymbol:!BINYZMDand!BINYZMDWand!BIZM2Dand!BINYZM2DW

References:

Zahorchak,MichaelG.TheArtofLowRiskInvesting.VanNostrandReinholdCompany,1977.

Thisbookisoutofprintadifficulttofind.Ifyouuncoverone,buyit.

CH 5 - Advance Decline RatioIndicatorsAdvances/Declines

Thebreadthindicatorsinthissectionutilizetheratiooftheadvancingissuesandthedecliningissuesastheirprimaryrelationship.

AdvanceDeclineRatioIndicatorsAdvance/DeclineRatio

BreadthThrust

BreadthThrustContinuation

DuarteMarketThrustIndicatorEliadesSignoftheBear

HughesBreadthMomentumOscillatorPanicThrust

STIX–ShortTermTradingIndexAdvance/DeclineRatio

Datacomponentsrequired:Advances(A),Declines(D)Description:Thisistheratioofadvancingissuesanddecliningissues(AdvancesdividedbyDeclines).

Interpretation:MartinZweiglikedtowatchthisratioovera10-dayperiod.Hesaiditwasveryrareforthe10-dayratiotoreach2-to-1(2.0)ormore.Itseemsthatthelevelof1.8isbetterwithmorerecentdata.Bothlevelsareshownonchart5-1.

Chart5-1

AuthorComments:Ratiosanddifferencesaccountformanydifferentvariationsoftechnicalindicators.Ifyoutakethe10-daydifferenceofpriceandplotitnexttothe10-dayratioofprice,youwillgetasimilarlyshapedline,onlythevaluesaredifferent.AnotherinterestingdiscoverywasthattheratioofadvancesanddeclineswascalledtheoverboughtoversoldindexbyNormanFosback(SteveAchelisusedthedifferenceofadvancesanddeclinesfortheoverboughtoversoldindex).Fosbacksaysthattheten-dayaverageoftheratioisgoodfordeterminingoverboughtandoversoldareasinthemarket.Hesaysthatthemarketisoversoldwhentheadvancesareatleast25%fewerthanthedeclines(0.75onchart5-2).Themarketisoverboughtwhentheratioshowsthatthenumberofadvancesisatleast25%morethanthedeclines(1.25onchart5-2).Fosbackstatesthatthisindicatorhasnottestedwellandisprobablyoverrated.Iaddedalineat1.70,whichmeansadvancesoutnumberdeclinesbyabout58%.Itisclearthatsincethelowin2009,theoverboughtareahasincreasedsignificantly.Chart5-2showsthattheAdvanceDeclineRatioseemstobetter

reflectoverboughtwithtoday’sbreadthnumbers.ThisisoneoftheissuesIhavewithanyoverboughtoversoldindicator,thelevelschangeovertime,soitmakesitunreliableifusedinanisolatedcondition.

Chart5-2

Formula:(A/D)

StockCharts.comSymbol:!BINYADR(pleasenote,thisisthe10-dayarithmeticaverageofA/D;ifyouwanttherawratioyoucanuse:$NYADV:$NYDEC).

References:

Fosback,NormanG.StockMarketLogic,FortLauderdale,FL:TheInstituteforEconomicResearch,Inc.,1976.

BreadthThrust

Author/Creator:MartinZweig

Datacomponentsrequired:Advances(A),Declines(D)Description:BreadthThrustisa10-dayexponentialaverageoftheadvancesdividedbythesumoftheadvancesplusthedeclines.ABreadthThrustsignaloccurswhenthisindicatorgoesfromunder0.40toabove0.615withina10-daytimeperiodorless.

Interpretation:Between1944and2014therewere13thrusts.MartinZweigsaysthatstrengthdoesindeedtendtoleadtogreaterstrength.Hegoesontosaythatpeoplewhomissthefirstmoveofanexplosiverallyandarewaitingforacorrection,oftenmissmostoftheaction.Chart5-3showstheBreadthThrustindicator.ThereddigitalversionquicklyidentifiesalloftheBreadthThrustsignals.Remember,thedigitalversionjustshowsthesignalsandnotalltheanalognoise.

Chart5-3

AuthorComments:IwishIhadadimeforeverytimeIhaveseenthisindicatormisquotedorusedincorrectly.Thecomponentthatisusuallyoverlookedisthatitmustgofromoversoldtooverboughtwithin10days.Since1965therehave

beenonly9BreadthThrustsignalsasshownincharts5-3.Herearethedates:

Thoseintimatelyfamiliarwiththemarketoverthelast40+yearswillrecognizethesecondandthirddatesasthefirstbottomofthegiant1973-74bearmarket,the1982dateaswithinaweekofthebeginningofthebiggestbullmarketinhistory,andthe1984dateasonethatcoincideswithagoodmarketbottom.TheMarch18,2009wasaboutaweekafterahugebullmarket.

RobertColbytestedthisindicatorover62yearsofdataandfoundthatbyusing0.659forabuysignalanddroppingbelow0.366forasellsignalworkedwell.However,heusedasimplemovingaverageinsteadofanexponentialone,anditappearshedidnotusethe10periodsforthesignaltooccur.However,thatdoesnotdetractfromtheimportanceofhisresultsandfurtheroffersanotheruseofthebreadththrustconcept.

AsIalwaysdo,IaskwhatIcandotothisindicatortoimproveit.Icanincreasethedaystogiveasignal,sayto15days.Thiswouldgivetheindicatormoretimetoreachitsgoalofgoingabove.615.Icanchangethesmoothingfrom10to8(tomakeitfaster),andevenchangethetypeofsmoothingfromexponentialtoarithmetic(tomakeitslower).Allofthesemayormaynotyieldbetterresults.Theproblemhereisthatoneisdeviatingfromtheinitialconceptandtryingtobuildabettermousetrap.MartinZweig’sconceptwasthatthemarketsometimeslauncheslikearocketandhewasattemptedtodefinethatwithhisBreadthThrust.ThefirstthingItriedwastochangefromusinganexponentialaveragetousingasimplemovingaverage.Itdidn’tprovideanyimprovement.Ithinktriedashorterperiodfortheexponentialaverage(8periods)anditgavemanymoresignalsbecauseitwasabletotravelfrom.4to.615quicker,however,itdidn’tappeartodrasticallyimprovetheoriginalwork.

Formula:(A/A+D)

StockCharts.comFormula:!BNYBTand!BINYBTD

References:

Achelis,StevenB.TechnicalAnalysisfromAtoZ.NewYork:McGraw-Hill,1995.

Colby,RobertW.TheEncyclopediaofTechnicalMarketIndicators.NewYork:McGraw-Hill,2003.

BreadthThrustContinuation

Author/Creator:GeraldAppel

Datacomponentsrequired:Advances(A),Declines(D)

Description:BreadthThrustisa10-dayexponentialaverageoftheadvancesdividedbythesumoftheadvancesplusthedeclines.ABreadthThrustoccurswhenthisindicatorgoesfromunder0.40toabove0.615ina10-daytimeperiodorless.ABreadthThrustContinuationiswhenitgoesabove0.615.Thismeansthelikelihoodofthemarketcontinuingitsupwardmoveisgreat.

Interpretation:ABreadthThrustContinuationsignalisgivenwheneveritgoesabove0.615withouttherequirementforittocomefrombelow0.40intendays.Thatcontinuationsignalisgooduntilitthendropsbelow0.50.Onchart5-4,theupwardspikesdenotetheBreadthThrustContinuationsignalswiththesellsignalsbeingthedownwardspikes.Subsequentsellspikesshouldbeignored.Theyonlycomeintoplayafteranupwardbuyspike.

Chart5-4

AuthorComments:TomMcClellanaddedanadditionalrulestatingthatthecontinuationsignalexpiresafter50days,butcanrestartthattiming(50days)withanysubsequentmoveabove0.615.Since1965therehavebeen31BreadthThrustContinuationsignals.

Formula:(A/A+D)

StockCharts.comFormula:!BINYBTCand!BINYBTCD

References:

McClellan,Tom,“TheMcClellanMarketReport,”November19,2004.

Achelis,StevenB.TechnicalAnalysisfromAtoZ.NewYork:McGraw-Hill,1995.

Colby,RobertW.TheEncyclopediaofTechnicalMarketIndicators.NewYork:McGraw-Hill,2003.

DuarteMarketThrustIndicator

AlsoKnownAs:Bi-weeklyMarketThrustIndicator(BMTI)

Author/Creator:Dr.JoeDuarte

Datacomponentsrequired:WeeklyData,Advances(A),Declines(D).

Description:TheBi-weeklyMarketThrustIndicator(BMTI)isameasureofmarketmomentum,andisbasedontheoften-overlookedweeklyvariationoftheadvancedeclineline.Itisapredictorofstockpricesoverthesixmonthsafterasignaloccurs.BasedonMartinZweig’sTenDayAdvanceDeclineRatio,BMTIusesweeklydata,asopposedtoZweig’sdailydata.ThedifferenceisthatZweigcapturedthemarket’sadvancedeclineratiofortenstraightdays,lookingforatwotooneratioofadvancingoverdecliningstocksonarollingbasis,whileBMTIfocusesonweeklydata.TocalculateBMTItaketheweeklyadvance-declinedataandaddtheadvancesandthedeclinesfortwoweeks.

Interpretation:Usingthisweeklyindicator,signalsaregeneratedforbuyingonlywhenevertheratioisequaltotwoorgreater.Ifyouboughtamarketaverageononeofthesesignalsandheldforatleastsixmonths,yourreturnwouldbegood.Chart5-5showstheDuarteMarketThrustIndicator.

Chart5-5

AuthorComments:OneoftheimportantconceptsthatDr.Duarteidentifiedwiththisindicatoriswhathecallsasupercluster.ThisiswhentheBMTIgivesseveralconsecutivesignals.Itmeansthatupsidemomentumishugeandthemarketcanstaybullishforuptoayear.Thesuperclustersincharts5-7aredenotedbythewiderspikes.Thewiderthespikeonthechart,meansmoreconsecutivesignals,andthebettertheindication.

Formula:(A/D)(weeklyvalues)

References:

Duarte,Joe,www.joe-duarte.com.

Zweig,MartinE.WinningonWallStreet.NewYork:WarnerBooks,1986.

EliadesSignoftheBear

Author/Creator:PeterEliades

Datacomponentsrequired:Advances(A),Declines(D).

Description:PeterEliadesfirstwroteabouthisin1992afternotingalackofvolatilityintheadvancedeclinenumbers.Afterapparentlymuchresearch,backto1940,hecameupwiththreerulesrequiredtoidentifythe“signofthebear.”

A.Theremustbeastreakof21-27consecutivedays(trading)wherethedailyadvance/declineratioremainsabove0.65andbelow1.95.

B.Thatsteakmentionedabovemustendwithadownsidebreakwhichmeanstheadvance/declineratioislessthan0.65.

C.Thedownsidebreakmustbeconfirmedbyeitheratwo-dayaverageadvance/declineratioorathree-dayaverageadvance/declineratiofollowingtheendofthestreakbeingbelow0.75.

Interpretation:Thisisnotanindicatorthatgivesmanysignals.InthepaperthatEliadeshasonhiswebsite,www.stockmarketcycles.com,therehaveonlybeen7“signofthebear”signalssincethelate1920s.Yes,thatisright,overthelast90+years.April,1998andSeptember,2000werethelasttwosignals.Inchart5-6,thethirdparameterisshowninthemiddleofthechartandcanbeusedforverification.Whenyouconsiderthatparameter,theearlysignalsinthe1990swillgoaway,leavingonlythe1998and2000signals.Personally,anindicatorthatonlygives7signalsin90yearsisnotofmuchvalue.However,thesethingscanteachyouaboutmarketactionandhelpyoucreateothers.

Chart5-6

AuthorComments:Thefirstrule(A)addressesthelackofvolatilitythathefirstnoticedwhenderivingthisindicator.Originallyitwasjust21days.Thesecondrule(B)requiresforadaytohaveatleast1.5timesmoredeclinesthanadvances.Thethirdrule(C)isawaytogivethebreakoutsometimeforconfirmation.Thisisanindicatorthatoneneedstobeawareof.Youshouldvisithiswebsiteandreadthepaperhewroteon“thesignofthebear.”

StockCharts.comsymbol:!BINYESOBand!BNYESOBD

References:

Eliades,Peter,www.StockMarketCycles.com,HughesBreadthMomentumOscillator

Author/Creator:JamesF.Hughes

Datacomponentsrequired:Advances(A),Declines(D),Unchanged(U).

Description:Thisratioindicatorusesallthebreadthmovement(advances,declines,unchanged)issuesinitsformula.Itisthedifferenceofadvancesanddeclinesasthenumeratorandthesumoftheadvances,declines,andunchangedasthedenominator.Thissumisalsothetotalissues.Hughesdefinedsellingclimaxesaswhenthedeclineswereover70%oftotalissueswhileadvanceswerelessthan15%oftotalissues.

Interpretation:Thisisanoscillatorthatutilizesallcomponentsofissue-orientedbreadth.Puttingoverboughtandoversoldzonewillmakethisagoodshorttermoscillator.Theshorterthetermthatyouwanttoworkwith,theshorterthesmoothingyoushoulduse.Chart5-7uses21daysandwouldbegoodforintermediatetermanalysis.

Chart5-7

HughesBreadthMomentum%OscillatorwasacreationofRobertColbyasanattempttoavoidusingnegativenumbersandfractionsandhaveitoscillate

around100.Overboughtandoversoldzonesat87and110seemtoworkwell.Colby’smodification,whilenotchangingtheconceptoftheindicatorisagoodimprovement.Chart5-8isthatmodificationfurthersmoothedby21days(redline).Theredlineistheindicatoryoushoulduse.Itwasdecidedtousetherawversionofthisindicatorandshowthesmoothingasanoverlay.Thiswayyoucanseehowyoucanchangethesmoothingtoyourdesiredvalue.

Chart5-8

AuthorComments:Thesumoftheadvances,declines,andunchangedissuesisnothingmorethanthetotalissues.Thisisyetanotherwaytoderivearatiothatshouldutilizethesameoverboughtandoversoldzonesovertime.IfTotalIssuestradedisavailable,andoneisenteringthisdatamanually,onecouldusethatasthedenominatorinstead.

Formula:(A–D)(A+D+U)or(A–D)TI

StockCharts.comFormula:!BINYHBMOand!BINYHBMOD

References:

Colby,RobertW.TheEncyclopediaofTechnicalMarketIndicators.NewYork:McGraw-Hill,2003.

Dworkin,FayH.,“DefiningAdvance/DeclineIssues,”Stocks&Commodities,Volume8,July1990,pp.274-278.

PanicThrust

Datacomponentsrequired:Advances(A),Declines(D).

Description:Thisindicatorisamethodtodetermineoverreactiontomarketextremes.Simpletocalculateand,whilenotalwaysaccurate,willcertainlyalertyoutothoseextremes.

Interpretation:Whenevertheratioofadvancestodeclinesisgreaterthan4,abuysignalisgiven.Thismeansthatthereweremorethan4timesasmanyadvancingissuesasthereweredecliningissues.Chart5-9showsallinstanceswheretheadvancesoutnumberedthedeclinesbyfourtoone.

Chart5-9

AuthorComments:Thereisnodoubtthatwhenmarketsgotoextremes,peoplereactdifferently.Inthiscase,theattempttopickabottombasedonanextremelyoversoldconditionisidentified.Thisindicatorwascreatedafterexperimentingwithanumberofdifferentratiosandfoundthatfourtoonewasreliable.

Formula:(A/D)>4

StockCharts.comsymbol:!BINYPTD

STIX

Author/Creator:ThePolymetricReport

Datacomponentsrequired:Advances(A),Declines(D).

Description:STIXisanacronymforShortTermTradingIndex.Itistheadvancesdividedbythesumoftheadvancesanddeclines.Thenyouexponentiallysmoothitwitha21daymovingaveragetogetSTIX.

Interpretation:LowSTIXreadingsarebearishandhighreadingsarebullish.STIXhasanormalrangeinthe42%and58%range.Somewhatoverboughtisintherangeof56%to58%andoversoldintherangeof42%and44%.Chart5-10showsSTIXwiththeabovementionedthresholds.

Chart5-10

AuthorComments:Becausethisisaratioofadvancestothesumofadvancesplusdeclines,theoverboughtandoversoldzonesmentionedbyFayDworkininhis1990articlestillappeartobegoodones.AslightfurtherenhancementmightbetoadditionallysmoothSTIXwithasimple10-dayaverage.Chart5-11showsthe10-daysimpleaverage(redline)ofSTIX.Onecanseethattheadditionalsmoothingremovedmanyofthesignalsandkeepthereallygoodones.

Chart5-11

Formula:(A/(A+D))*100

StockCharts.comsymbol:!BINYSTIX

References:

Dworkin,FayH.,“DefiningAdvance/DeclineIssues,”Stocks&Commodities,Volume8,July1990,pp.274-278.

Chande,Tushar,“BreadthStixandOtherTricks,”Stocks&Commodities,Volume12,May1994,pp.211-214.

CH6-AdvanceDeclineMiscellaneousThebreadthindicatorsinthesectioncouldnotbecategorizedasusingthedifferenceortheratiooftheadvancesanddeclines,sotheyareinthemiscellaneoussection.

AdvanceDeclineMiscellaneousIndicators

Advances/IssuesTraded

AdvanceDeclineDivergenceOscillator

AdvanceDeclineDiffusionIndex

BreadthClimax

DecliningIssuesTRIX

DisparityIndex

DynamicSynthesis

UnchangedIssues

VelocityIndex

Advances/IssuesTraded

Alsoknownas:SchultzAT

Author/Creator:Schultz

Datacomponentsrequired:Advances(A),TotalIssues(TI)

Description:Thisindicatorlooksatonlytheadvancingissuesrelativetothetotalissues,calculatedasaratio.

Interpretation:Schultzdidnotusetotalissues,butsummedtheadvances,declines,andunchangedissueswhichwouldyieldthesameresult.Chart6-1showsthatinitsrawfrom(unsmoothed),thiswouldbeadifficultindicatortouse.However,ifyouputthresholdvaluesontheoscillator,youcanseeithelpsidentifythespikesrelativetomarketaction.

Chart6-1

AuthorComments:OtherthanabriefreferenceinaveryoldCompuTracsoftwaremanual,IhavenotbeenabletofindoutanymoreaboutthisindicatororaboutMr./Mrs.Schultz.IspokewithTimSlater,thefounderofCompuTracandhewasgraciousenoughtolookthroughhisoldfilestoseeifhecouldfindanyreference.TimcalledmebackafewweekslaterandwasofthebeliefthattheindicatorwasobtainedfromDunnandHargitt,howeverhecouldnotuncoveranyfurtherinformation.

2015Update:WenowknowallabouttheSchultzAT–seethearticlebelowbyGeorgeSchade.

Likemanyindicators,smoothingthisonewillgreatlyenhanceitsusefulness.Itisapparentfromchart6-2thattheadvancingissueswillleadalmostallmarketupmoves.

Chart6-2

MygoodfriendGeorgeSchade,thelawyer,theexcellenttechnicalanalyst,themarkethistorian,thesuperbresearcher,andtheonewhohasdampenedafewofmybrusquewritingsintolessoffensiveprosehasgivenmepermissiontoreproduceanarticlehewrotein2011abouttheoriginsofthenowmisnamedindicatorSchultzAT.ItispresentedbelowwithsomeminoreditingonmyparttoreducethenumberofparagraphsandremovaloftheEndnotes.Ialsoenlargedthechartsignificantly.Ihaveinsertedafewnoteswhichbeginwith:Note.Anyerrorsperceivedorrealaremyfault.

_____________________________________________

SCHULTZAT-THEMISNAMEDINDICATOR

BYGEORGESCHADEJR.,CMT

Tracinganindicator’soriginisanexcitinghunt.GregoryMorrisandRobertColbyhavewrittenaboutthe“SchultzAT”measureofmarketbreadth.Morris

askedwhoSchultzwasbutdidnotgetacompleteanswer,whileColbysuggestedthatAThadbeennamedafterJohnW.Schulz(no“t”inthesurname).AT’sformulaissimple,namely,thetotalnumberofadvancingissuesisdividedbythenumberoftotalissuestraded.Thenon-accumulatedratiosarecharteddailyorsmoothedpreferablywithashorttermmovingaverage.NeitherHarryD.SchultznorJohnW.SchulzoriginatedtheATindicator,butbothpopularizedit.HaroldM.GartleycreatedATandwroteaboutitin1935.

I.JohnW.Schulz

JohnW.SchulzwasanearlymemberoftheMarketTechniciansAssociation(“MTA”).In1979,hereceivedtheMTAAnnualAward.AccordingtoRalphAcampora,SchulzwasaprimarydrafterofthecharterMTAConstitution.In1972,SchulzwrotetheMTA’sPrinciplesandPoliciesdocumentassociatedwiththeconstitution.TheMarketTechnicianAssociationJournal(nowtheJournalofTechnicalAnalysis)reprintedanarticlein1979writtenbySchulzconcerningtheKondratieffWave.

Between1959and1976,SchulzworkedforatleastthreeWallStreetfirms.Atthelastfirm,asManagingDirectorofBreanMurray,FosterSecurities,Inc.,hewroteamarketletterentitledTheTechnicalReview.FromOctober1,1959,toMarch15,1976,hewroteacolumnforForbesmagazine.ThecolumnwasinitiallyentitledTechnicalPerspectiveandlaterTechnician'sPerspective.SchulzwaspartofthehighlyregardedgroupofwritersatForbesthatincludedHeinzH.Biel,LucienO.Hooper,andSidneyB.Lurie.

In1962,SchulzwroteTheIntelligentChartistwhichisavailableintheMTALibrary.Note:IjustcheckedandAmazonhasitfor$499;mycopyisnotforsale.Inthebook’slastsection,Schulzdescribedthedataheanalyzedtomeasuremarketmovements.Heconsideredthenumberofdailyadvances,declines,andunchanged-theissuestraded-tobe“perhapsthemostenlighteningofthe”dailymarketnumbers.”

Hewrote:“Inmyopinion,thedailynumberofissuesadvancingismoreusefulbyfar.Thispartofthemarketisshown…asapercentageofallissuestradedfortheday.Imakenofurtheradjustmenttothis(oranyother)figure[suchasmovingaverages];buttherawdataseempreferabletome;despitethewidevariationsoverbriefperiods,thetrendofthevariationsthemselvesbecomesquiteclearlyapparent.Asimilarlinecouldbeplottedforthepercentageofissuesdeclining.Butthis,too,wouldaddtotheclutter;andanyway,theissues-downfactorismoreorlessimplicitinitsopposite,-theissues-upline.”

Schulzcalledthepercentageofdailyadvancestoissuestradedthe“issues-upline.”Becausethe“issues-uplinealonecanserveasanearlyindicatorofchangesintrenddirection,”hecomparedittotheDowJonesIndustrialAveragetodetectdivergences.viForthispurposes,headvisedusingtheissues-uplinetogetherwithvolumeandthecumulativeadvance-declineline.SchulzusedAT,buthewasnotitsoriginator.Heconcededthat“thereisnothingespeciallyoriginalaboutmyapproachtothismaterial;andthedatathemselveshavelongbeenrecognizedasusefulandsignificantandareinthetoolkitofmostcarefultechnicians.”

II.HarryD.Schultz

Forover45years,HarryD.Schultzproducedthe“InternationalHarrySchultzLetter.”Reportedly,hepublishedthelastissueinDecember2010.Hefrequentlywroteonfinancialpanicsandcrashes.AninterviewheldonJuly11,2010,isenlightening.In1962,SchultzwroteBearMarketInvestingStrategiesinwhichhedescribedthe“percentofadvancesindex”indicatorasfollows(the17thindicatoronhislistof18):“Percentofadvancesindex.Dividethedailyadvancesbytheissuestraded.Thisisanotherwayofapproachingtheoverbought–oversoldproblem.A10-daymovingaverageisprobablybest.Inchartingit,you’lldiscoverhowtointerpretit,fortheextremesbecomeobviouscues.Whenitfallsbelow40%,it’sasignalofweaknessahead.”

The“percentofadvancesindex”isthesameasthe“SchultzAT”indicator.MostlikelythisdescriptionisthebasisfornamingtheindicatorafterHarryD.Schultz.Interestingly,JohnSchulzandHarrySchultzpublishedaboutATthesameyear-1962.UnlikeSchulz,SchultzsmoothedATwitha10-daymovingaverage.InBearMarketInvestingStrategies,SchultzwroteaboutthestockmarketvolumeworkofHaroldM.Gartley,“agreattechnicianinthe1930s.”GartleyclosesthiswonderfulstorybecauseheoriginatedAT.

III.HaroldM.Gartley(1899-1972)

In1966,Schultzeditedwhathasbecomeaprimarysourceforhistoricalresearch,namely,ATreasuryofWallStreetWisdom.ThebookcontainsthechapteronvolumefoundinGartley’sclassicbookProfitsintheStockMarket.Schultz’sknowledgeofGartley’sworkissignificantbecauseGartleycreatedamarketbreadthindicatorthatwastheratioofdailyadvancesdividedbythenumberoftotalissuestraded,thesameindicatorthatJohnSchulzandHarrySchultzdescribedalmost30yearslater.GartleyreceivedadegreeinCommercialScienceandaMaster'sDegreeinBusinessAdministrationfrom

NewYorkUniversity.Beginningin1912,heworkedinWallStreetasastockbroker,adviser,analyst,instructor,andfinancialpublicrelationscounsel.By1932,hewasanadjunctlecturerattheColumbiaBusinessSchoolwhenBenjaminGrahamtaughtthere.

Gartleybeganstudyingbreadthofthemarketin1931.Ayearlater,inaBarron’sarticle,Gartleyincludedachartthatshoweddailyadvancesanddeclines.Thearticledidnotdescribeorshowtheratioofadvancesandtotalissuestraded.ATappearedinchapter15ofGartley’sProfitsintheStockMarketpublishedin1935.Chapter15,entitled“Breadth-of-the-Market,”headlined:“Althoughthissubjecthasbeenstudiedbymanymarketstudents,withtheexceptionoftheauthor’swork,weknowofnopublishedmaterial.”ItispossiblethatthemarketbreadthworkofLeonardP.AyresandJamesF.HugheswaseithernotfullyknowntoGartleyorascomprehensiveashemayhavedesired.

Gartleywrotethatthe“reasonwestudythegeneralstatisticsofthemarketistoobtainwhattheoldtimetradercalled‘abetterfeelofthemarket’.”Hebelievedinanalyzingbreadthofthemarketnumbersbecause:”thevalueofthistypeofstudycannotbeoveremphasizedasatimingdeviceprovidingconsiderableaidtothetechnicalstudent.Itisbelievedthatnosinglebranchofstockmarkettrendresearchwillyieldgreaterresults.Thiscontentionisbasedonthebeliefthatthegrowthanddeteriorationofbullishandbearishmarketsentimentisclearlyreflectedinthegeneralmarketstatistics,providingthatadequateanalysisismade.”

Themarket-derivedstatisticsarethesameusedtoday,namely:

1.Numberofissuestraded

2.Numberofadvances

3.Numberofdeclines

4.Numberofpricesunchanged

5.Numberofnewhighs

6.Numberofnewlows

7.Totalvolume

8.Ratiooftradinginthe15mostactivestockstototalvolumeGartley’smarketletteraswellasotherfinancialpublicationsprovidedthedata.TheWall

StreetJournalwasreportingNewYorkStockExchangeadvances,declines,andunchangedbyFebruary19,1932,andsowasBarron’sbyMay1,1933.Gartleyemphasizedthat“thesestatisticsmustbeconsiderablyrefined,inordertobeofanypracticalvalue.”Even“afterayearortwo,itwasfoundthatconsiderablerefinementwasnecessary,andevenafterseveralyearsofexperiencenoarrangementofthedatahasbeenfoundwhichreliablyreflectseachsuccessiveintermediateturningpoint.”

RefinementledtoAT.AccordingtoGartley:“Experiencewiththerawdata…soonshowedthatithadtobesomewhatrefinedifitwastobeuseful.Sotheideawasconceivedtoreduceallthedatatosomeuniformbasis,and,insteadofusingjustthenumberofadvancesanddeclines,aratiowaspreparedwhereinthepercentageoftheadvancesandthedeclines,ascomparedtothetotalissuestradedeachday,wascomputed.”

Inchapter15ofProfitsintheStockMarket,Gartleyshowedtheresultsofusinga7-daymovingaverageoftheratiosofdailyadvancesanddeclinescomparedtothenumberoftotalissuestraded.Hefoundthatwhenthe7-daymovingaverageoftheratioofadvancestototalissuestradedexceeds60%,itistimetoconsidersellingstocks,andwhenthe7-daymovingaverageoftheratioofdeclinestototalissuestradedrisesabove60%,itistimetobuystocksespeciallyifadeclinehasbeeninprogressforsometime.Gartleyfoundtheseindicatorsusefultodetermineintermediatetrendreversals,buttheyalsodevelopedsomeratherconsistentminortrendsignals.AnominaldistinctionisthatGartleyuseda7-daymovingaveragewhileHarrySchultzsuggesteda10-daymovingaverage.

In1981,theMarketTechniciansAssociationJournalreprintedanarticlethatGartleywroteinAugust1937,whichessentiallywaschapter15ofProfitsintheStockMarket.ThearticleisentitledBreadthoftheMarketTrends.Gartley’sATisshowninChart1belowasitappearedintheJournal’sarticle.Line1showsthenumberofunchangedinJuneandJuly,1932.Line1AshowstheratioofunchangeddividedbytotalissuestradedinAugustthroughNovember,1932.Line2showsthenumberofadvancesinJuneandJuly,1932.Line2AshowstheratioofadvancesdividedbytotalissuestradedinAugustthroughNovember,1932.Lines3and3AshowtheStandardStatisticsDaily90-StockIndexforcomparisonpurposes.Lines4and4Ashowthesamefordailydeclinesinthesametimeperiods.

Chart1.TheFirstShowingofAdvances/TotalIssuesTraded.

Note:I(Greg)broketheoriginalgraphicintoatopsectionandbottomsectionsoIcouldenlargethem.

Chart2inGartley’sarticleshowsthe7-daymovingaverageofbothadvancesanddeclinescomparedtototalissuestradedbetweenJune,1932,andApril1937.Chart2isnotshownherebecauseitsreproductionisnotasclearasthatofChart1.

IV.Conclusion

HaroldM.GartleyoriginatedtheAdvances/TotalIssuesTradedaswellastheDeclines/TotalIssuesTradedindicators.JohnSchulzandHarryShultzpopularizedATbutcannotbecreditedwithitsinvention.Morris’inquiryisanswered.HaroldM.GartleyoriginatedAdvances/TotalIssuesTradedasHarryShultzandJohnSchulzuseditfiftyyearsago.Andfinally,toborrowliberallyfromShakespeare’sRomeoandJuliet:“What’sinaname?ThatwhichiscalledSchultzAT

ByitspropernameGartleyATwouldbeastrue.”

ThanksGeorge.

BackwithGreg-Intheearly1990s,NormNorthandIhadcreatedasimplePointandFigurechartingsoftwarethatdownloadeddailydatafromWarnerComputer.IsentanumberofcopiesouttomyshortlistoffolksIknewusedPointandFigure,onewasJohnW.Schulz;thesameJohnSchulzmentionedbyGeorgeandalsoafoundingmemberoftheMTA(MarketTechniciansAssociation.JohnSchulzcalledmeonedaytothankmeandaskedifIwouldhelphimgetthesoftwaregoingasheclaimedhewascompletelynotathomewithacomputer.Overthenextfewmonthswespokeacoupleoftimesaweek,usuallyintheeveningandeventuallyIhadhimsetuptodownloaddataeveryevening,chartitwiththeboxsizeandreversalperiodhewanted,andthenprintit.Hewasagentleman100%ofthetime.Wetalkedaboutthemarketsoften–hehadafascinatingunderstandingofthemarkets.OnedayIreceivedalargepackageandinitwashisbook,“TheIntelligentChartist,”alongwithmanyhand-drawnpointandfigurecharts.HeaskedmeifIwouldliketobeonhisfaxlist.IsaidyesandforacoupleofyearsuntilhediedIreceivedhundredsofhand-drawncharts.NotoncedidIaskhimwhyhedidnotusemysoftware.

Formula:(A/TI)

References:

1984CompuTracsoftwaremanual.

AdvanceDeclineDivergenceOscillator

Author/Creator:ArthurMerrill

Datacomponentsrequired:Advances(A),Declines(D),Unchanged(U)MarketIndex(MKT).

Description:ThiswasArthurMerrill’sDisparityIndex;anattempttoseehowa

breadthindicatorperformedrelativetoamarketindex.Hestatedthathedidnotlikethesubjectivityofvisuallylookingatachartofeachone.Hereiswhathesaid:“Thecomparisonisn’teasy,sincethemarketaverageisindollars,andtheadvancedeclinelineisanaccumulationwhichcouldstartanywhere.”Hemadethecomparisonintoanoscillator.Ratherthansubtractingoneindexfromtheother,hecalculatedasimpleleastsquaresregressionline.Thecalculationisthesameasaleastsquarestrend,excepttheordinalstatisticsaretheDowJonesIndustrialAverage,andtheabscissastatisticsaretheadvancedeclineaccumulation(advancedeclineline).Tomaketheoscillator,hecomparestheDowwiththeleastsquaresline,andthencalculatedthepercentagethattheDowwasaboveorbelowtheline.IusedtheNYSECompositeintheseexamples.

Interpretation:IftheAdvanceDeclineDivergenceOscillatorispositive,theNYSECompositeispullingaheadoftheAdvancedeclineLine.Assumingabetterbreadthindicatoroverprices,apositivevalueisbearishandanegativevalueisbullish.ArtMerrillalsousedsignalsbasedupon2/3ofastandarddeviation.Itwasbullishwhenitwasbelow-0.7andbearishwaswhenitwasabove+5.4.Chart6-3isamodifiedversionofArtMerrill’sAdvanceDeclineDivergenceOscillator.Itnormalizesthemarketpricedataandalsotheadvancedeclinedata,thenlooksatthedifferencebetweenthetwo.Aperiodfornormalizationofoneyear(252days)wasused.WhileconsiderablydifferentthanMerrill’swork,theconceptisidentical.Chart6-3clearlyshowstheconceptthatArtMerrillwastalkingabout.ThetopplotistheNYSECompositeIndexandthebottomplotistheADDivergenceOscillator.

Chart6-3

AuthorComments:Youcanseefromchart6-3thatwhenevertheadvancedeclinelineisstrongerrelativetotheNYSEComposite,theoscillatorisabovethezeroline.Itisapparentfromthisindicatorthattheadvancedeclinelineisaveryearlywarningindicatoroffuturemarketdirection,especiallyatmarkettops.Andthisisgoodbecausemostindicatorsarebetteratidentifyingmarketbottoms.

ArthurMerrillalsoincludedintheadvancedeclinecalculationEdmundTabell’sadjustedADvaluebydividingthedifferencebetweenadvancesanddeclinesbytheunchangedissues.EdmundTabellfiguredthatiftheunchangedissueswerelow,thentherewasagreatdealofconvictioninthemarket.

Formula:∑((A–D)U)MKT

StockCharts.comSymbol:!BINYADDO

References:

Merrill,Arthur,“MoreTrendDirection.”Stocks&Commodities,Volume6,June,1988,pp.218.

Merrill,Arthur,“FittingaTrendlinebyLeastSquares.”Stocks&Commodities,Volume6,July,1988,pp.254.

Merrill,Arthur,“AdvanceDeclinedivergenceasanoscillator.”Stocks&Commodities,Volume6,September,1988,pp.354.

AdvanceDeclineDiffusionIndex

Author/Creator:RichardCarlin

Datacomponentsrequired:Advances(A),Declines(D),TotalIssues.

Description:Thisisa10daymovingaverageofthepercentageofadvancingissuesovertotalissues.

Interpretation:AccordingtoCarlin,simplywatchforchangeindirectionaheadoftheappropriatemarket.Thisisnotunliketheadvancedeclinelineinterpretation,butmuchshorterterminnature.Carlinalsosaysthatwhenitdescendsfromahighlevelwhilethemarketcontinuestorise,asellsignalisathand.Complementarily,whenitrisesaheadofthemarketabuysignalisgiven.Healsosuggestsusingitwithweeklydata.Chart6-4showstheADDiffusionIndex.

Chart6-4

AuthorComments:I’mconfusedatthenameforhisrelativelysimpleindicator.Wheredothedeclinescomeintoplayandwhatdoesitdiffuse?TherewasonlyasinglesourceofinformationonthisindicatorthatIcouldfind.Becauseagoodbullmarketwillhaveeverexpandingadvancingissues,thiscouldofferadivergentindicatorforlongupmoves.

Formula:(A/TI)*100for10days.

References:

Carlin,RichardK.,PhD,“Technicalanalysisofindustrygroups.”Stocks&Commodities.Volume6,November,1988,pp.408-410.

BreadthClimax

Author/Creator:GeraldAppel

Datacomponentsrequired:Advances(A),Declines(D),Unchanged(U).

Description:Abuyingclimaxiswhenthemarketputstogethernomorethantwoconsecutivedayshaving1000ormoreadvancingissues.Asellingclimaxiswhenthefollowingconditionsaremet:1.Atleast70%ofthetotalissuesaredeclines.

2.Nomorethan15%ofthetotalissuesareadvances.

3.Lessthan150issuesareunchanged.

Interpretation:Wheneitherthebuycriteriaorthesellcriteriaaremet,aBreadthClimaxhasoccurred.Thismeansthatthebuyingorsellinghasreachedanexcessandthemarketshouldreverseitsprevioustrend.

AuthorComments:GeraldAppeldevelopedthissystemover30yearsago.Thebreadthnumbershavechangeddramaticallysincethen.Itookthebasicconcepthewasusingandfoundabettersetofparameters.Abuyingclimaxoccurswhentherearetwoconsecutivedayswheretheadvancesaregreaterthan65%ofthetotalissues.Asellingclimaxiswhenthefollowingconditionsaremet(onlyslightlydifferentthatAppel’s):1.Atleast75%ofthetotalissuesaredeclines.

2.Nomorethan15%oftheissuesareadvances.

3.Therearelessthan150issuesunchanged.

Chart6-5showsthebuyingclimaxesasupwardspikesandthesellingclimaxesasdownwardspikes.

Chart6-5

Chart6-5fairlywellidentifiesperiodsinthemarketwhensharpdeclinesoradvanceshaveoccurred.Thelongperiodbetween1988and2001,withoutanybuyingclimaxesfallsinlinewithanumberofotherindicatorssimilartothisone,suchasMartinZweig’sBreadthThrust.Inabullmarket,afteritgetsunderway,therearefew,ifany,buyingclimaxes.

StockCharts.comSymbol:!BINYBCD

References:

Appel,Gerald.WinningMarketSystems.Greenville,SC:TradersPress,1973.

DecliningIssuesTrix

Author/Creator:GilbertRaff

Datacomponentsrequired:Declines(D).

Description:TheTrixindicatorwasdevelopedbyJackHutson,publisherofStocks&Commoditiesmagazine.Trixisdefinedastheoneperiodpercentchangeofanx-periodexponentialmovingaverageofanx-periodexponentialmovingaverageofanx-periodexponentialmovingaverageofprice.Oritisalsoknownastripleexponentialsmoothing.GilbertRaffhastakenthedailynumberofdecliningissuesandappliedtheTrixsmoothingusinga35-dayperiod.

Interpretation:Chart6-6showstheDecliningIssuesTrixindicator.Whentheindicatorgoesfrompositivetonegative(crossesthezerolinefromabovetobelow),itisapositivesignalforthemarket.Similarly,whenitrisesabovethezerolineitisanegativesignforthemarket.Thisisaninvertedindicatorinthatregard,becauseitusesdecliningissues.

Chart6-6

AuthorComments:Thisseemstoworkfairlywellwhenthemarketistrendingwell.However,ithasmanywhipsawsduringsidewaysmarketaction.The

extremesinthisindicatorseemtoidentifymarkettopsandbottoms.Usingthiswithashorttermsimplemovingaveragemightgeneratesomegoodsignals.YouknowIhavetodothis,chart6-7istheAdvancesTRIX.AtfirstglanceitappearstojustbethecomplementofthedecliningissuesTrix,butcloserexaminationwillrevealthatitisnot.UsingtheAdvancingIssuesTrixwitha10-daysmoothing(dottedline)seemstogiveagoodwaytousethis.Whentheindicatorisabovethezerolineanditdropsbelowits10dayaverageasellsignalisgenerated.Whentheindicatorisbelowthezerolineanditrisesaboveits10dayaverageabuysignaloccurs.

Chart6-7

Formula:Exponentiallysmooththedeclines3timesandthentakeaone-dayrateofchange.

StockCharts.comSymbol:!BINYAITand!BINYDIT

References:

Raff,Gilbert,“ExponentiallySmoothingtheDailyNumberofDeclines.”Stocks&Commodities,January1992,pp.15-18.

MetaStockProfessional,EquisInternational,SaltLakeCity,UT.

DisparityIndex

Alsoknownas:AdvanceDeclineDivergenceOscillator

Author/Creator:JamesAlphier,inanOctober,1988articlesaidthatJamesHugheshadwrittenonthesubjectofthedivergencebetweentheadvancedeclinelineandthemarketindices.HugheswasthefirstpersontowhomCol.LeonardP.Ayresshowedthisnewideaofcountingthenumberofadvancesanddeclinesin1926.CharlesDowmayhavebeenfirst,ashedidsoina1901marketcommentary(seeIntroduction).

Datacomponentsrequired:Advances(A),Declines(D),MarketIndex(MKT).

Description:Thisisanattempttospotthedivergenceoftheadvancedeclinelineandamarketindex.Itiswelldocumentedthatsuchdivergencescanbeleadingindications,however,theleadtimeistheissuethatseemstobethemostdifficulttodealwith.

Interpretation:Likemanytechnicalindicators,lookingforadivergencewiththepricebasedcounterpartisthepurposeoftheDisparityIndex.Oneofthebestwaysofdoingthisistoputbothindicatorsonthesamechartandvisuallydeterminewhentheywerediverging.Infact,thisishowitisdonemostofthetimebecauseofthevisualcapabilities.Chart6-8showstheNewYorkCompositeindexonthetopplotandtheAdvanceDeclineLineonthebottomplot.

Chart6-8

AuthorComments:Ihaveattemptedtocreateanindicatorthatshowsthedivergencebetweentheadvancedeclinelineandthemarketindex.Theconceptwastofirstnormalizethecomponentsoverthelongterm.Thiswouldgivethemequalweightingintheoverallcalculation.Secondly,Ithensmoothed,exponentially,thedifferenceovera10-dayperiod.Iworkedwithanumberofdifferentsmoothingvalues,butthe10-dayperiodwaslongenoughtogivethedivergenceIwantedtosee,andshortenoughtobetimely.Thelongerthevaluedusedthebetterthedivergenceshowedup,butwasalmosttoolatetobebeneficial.VerysimilartothedivergenceindicatorArtMerrillcreated,chart6-9showspositivewheneverthebreadth(AdvanceDeclineLine)isoutperformingtheprice(marketindex).ThetopplotisboththeNewYorkCompositeIndex(solidline)andtheAdvanceDeclineLine(dottedline).

Chart6-9

Formula:(PreviousValue+(A–D))/MKT

StockCharts.comSymbol:!BINYDI

References:

Alphier,James,“TheTragicNeglectoftheOldMasters.”Stocks&Commodities,Volume6,October,1988,pp.395-396.

DynamicSynthesis

Author/Creator:WalterA.Heiby

Datacomponentsrequired:Advances(A),Declines(D),UnchangedIssues(U),MarketIndex(MKT).

Description:In1965,WalterHeibywroteaboutamethodtohelpdeterminemarkettopsandbottoms.Tousehistechniqueonehastotakethe10-day

averageofadvancingissues,the10-dayaverageofdecliningissues,andthe10averageofunchangedissues,eachplottedseparately.Theplotsneedtofurtherdividetheplotsintoquarters,startingoverevery50days.Saidadifferentway,wearelookingfornew10dayhighsorlowsintheadvances,declines,andunchanged.Thenewhighsorlowsarebaseduponthelast50days.

Interpretation:Heibystatesthattheunchangedissuesnormallymoveinthesamemannerastheadvancingissuesandoppositethatofthedecliningissues.Thereisastrongtendencyonthepartoftheunchangedissuestobelowatgoodbuyingopportunitiesandtobehighnearrallytops.Chart6-10showstheNewYorkIndexandthecomponentsofHeiby’sDynamicSynthesis.YoucanseethatSeptember,2001gaveagoodbuyingopportunitybaseduponHeiby’sanalysis.Similarly,October,2002didalso.Remembertheissuesplotmustbeinthetoporbottomquartileinorderforthesignaltobegenerated.TheseplotsdidnotadheretoHeiby’sdesiretolookatnewhighsandlowsonlyoverthelast50days,astheredidnotseemtobymanysignals.

Chart6-10

BuySignalCriteria:

1.Themarketindexmustbeinthebottomquartile.

2.Theadvancesindexmustbeinthetopquartile.

3.Theadvancesindexmustbegreaterthanthedeclinesindex.

4.Theunchangedissuesmustbeinthetopquartile.

SellSignalCriteria:

1.Themarketindexmustbeinthetopquartile.

2.Theadvancesindexmustbeinthebottomquartile.

3.Thedeclineindexmustbeinthetopquartile.

4.Theadvancesindexmustbelessthanthedeclinesindex.

5.Theunchangedindexmustnotbeinthelowestquartile.

AuthorComments:WiththebigchangesinpricingontheNewYorkStockExchangein1997(pricingwenttosixteenthsfromeighths)andearly,2001(wenttodecimalpricing-cents),theunchangedissuesaredistortedsoonehastoensureyouareviewinglikedata,evenwhenadjustingtheindividualissuesonapercentageoftotalissues.Thisisespeciallytruewiththeunchangedissuessincetheywerethemostaffectedbythepricingchanges.Chart6-11showsthethreecomponentsadjustedfortotalissuesduringa6-yearperiodofexceptionalmarketvolatility.OnecanspotnumerousoccurrencesofHeiby’stheory.

Chart6-11

NormalizingthevariouscomponentsoftheHeibydynamicsynthesisoverafifty-dayperiodandcreatingbuyandsellsignalsbasedupontheparametersabove,takesoutthevisualchartsubjectivity.Chart6-12showsHeiby’ssignalswiththeupspikesbeingbuysignalsandthedownspikesbeingsellsignals.Thereareentirelytoomanysellsignals,butIdecidednottotrytofixit.

Chart6-12

Formula:Thisisachartingmethodusingamarketindex(MKT),advances(A),declines(D),andunchangedissues(U).

StockCharts.comSymbol:!BNYWHDSD

References:

Heiby,Walter.StockMarketProfitsthroughDynamicSynthesis.Chicago:TheInstituteofDynamicSynthesis,1965.

UnchangedIssues

Datacomponentsrequired:Unchanged(U).

Description:LookingattheunchangedissuesthattradedisanewtwistandresearchedbyAnthonyTabell.EarlierwritingswerebyWalterHeibyin1965.

Interpretation:Ondayswithahighnumberofunchangedissues,andthemarket

wasupbaseduponbreadth,therehadtobefeweradvances,andevenfewerdeclinesthannormal.Thiscouldmeanthatamarkettopisbeingputintoplaceasissuesrefusetoadvancefurther.Infact,itisnormalforthenumberofunchangedissuestoincreaseasthemarketpeaks.Duringamarketdecline,alownumberofunchangedissuesusuallyindicatethedeclinewillcontinue.Becauseoftheusualquickandsharppatternsgeneratedatmarketbottoms,theunchangedissueswilltendtobelow,initially,asthedecreaseinthenumberofdeclinesisovertakenbytherapidriseinadvancingissues.Tabellsaysthatthelownumberofunchangedissuesisgenerallybullishoveraone-yearperiod.Chart6-13showstherawunchangeddata.

Chart6-13

Smoothingtherawunchangedissuesby21dayspresentsasimilarshapedchart(chart6-14)butsomewhateasiertoreadanduse.

Chart6-14

AuthorComments:Theoretically,whentherearealargenumberofissuesnotadvancingordeclining,themarketisusuallyintheprocessoftopping.Lookingatthechartofunchangedissuesasapercentageoftotalissues,alowreadingismorebullish,withthehighreadingsbeingbearish.

Therearethreethingsonthechartofunchangedissuesthatbotheredme.Onewasthelargeincreaseinunchangedissuesfrom1991to1997.Theothertwowerethesignificantdropsinmid-1997andJanuary,2002.ThelargedropinunchangedissuesinJune,1997wasthebeginningsteptodecimalizationbymovingtotheusesixteenths(1/16)orabout6.25centsinpricing.Previously,thesmallestpricemovewasineighths(1/8)or12.5cents.ThelargedropinJanuary,2002waswhentheNewYorkExchangechangedfromusingfractionstousingdecimals.Astockcannowbeanadvancingoradecliningissuewithonlyaonecentmove.

Ifyoulookatthechartofunchangedissuesabove,youwillquicklynoticethat

theunchangedissuescontinuetoclimbasthemarketralliedduringtheperiodfrom1991to1997.Whyisthis?ItisbecauseofthelargegrowthinoverallissuesontheNewYorkStockExchangeduringthattimeperiod.Thisiswhymanysinglebreadthcomponentsmustbeusedasaratio.Idividedtheunchangedissuesbythetotalissuesandthensmootheditby21days.Noticeinchart6-15thattheincreaseintheperiodfrom1991to1997wentaway.Yes,therewasgrowthinthenumberofissues,butnotinjusttheunchangedissues.

Chart6-15

Becauseofthetwostepsinthemiddleof1997andearly2001togettothedecimalizationofminimumpricechangesintrading,usingtheunchangedissuesbythemselvesshouldbedoneinstepstoeliminatethetwosignificantdropsinunchangedissues.Chart6-15bshowstheunchangedissuesasapercentageoftotalissuesoveratwo-yearperiodstartinginearly-1987.YoucanseethatasthemarketralliedoffofthelowsetinOctober,1987,theunchangedissuescontinuedtoclimb.Thisseemstofollowthelogicoftheunchangedissues

talkedaboutearlierinthissection.

Chart6-15b

Formula:(U).

StockCharts.comSymbol:!BINYUPTI

References:

Jaffe,CharlesA.,“UnchangedStocks.”Stocks&Commodities,Volume8,January1990,pp.44.

VelocityIndex

Datacomponentsrequired:Advances(A),Declines(D),Unchanged(U).

Description:Thisindicatormeasurestheunchangedissuesandadvancingissuesrelativetototalissues.Ittakesonehalfoftheunchangedissuesandtheadvancingissuesandthendividesthatsumbythetotalissues.

Interpretation:MovesintheVelocityIndexgreaterthan+10and-12normallyindicatecontinuedmovementinthatdirection.Keepinmindthatthisisnotmuchdifferentthantheadvancesasapercentoftotalissues.Theadditionofusingonehalfoftheunchangedissueswouldimplythatthisindicatorwouldbecoincidentatmarkettopsastheadvancingissuesdryup.Chart6-16showstheVelocityIndex.

Chart6-16

AuthorComments:IputhisindicatorintoabreadthformulapackageIcreatedover25yearsago.Icannotfindanyadditionalinformationonitorwhocreatedit.Itwasn’tme.

Formula:(U/2+A)/(A+D+U)

StockCharts.comSymbol:!BINYVI

References:

Morris,Greg,“IndicatorsandTradingSystemsSoftware,”G.MorrisCorporation,Dallas,TX.

CH7-NewHighNewLowIndicatorsThisChaptercontainsalltheindicatorsthatarededicatedtousingNewHighsand/orNewLows.

NewHighNewLowIndicators

HighLowDifference

NewHighs–NewLows

NewHighNewLowLine

NewHighs&NewLowsOscillator

NewHighs&NewLowsDerivations

HighLowRatio

NewHighs/NewLowsRatio

HighLowMiscellaneous

NewHighs&NewLows

NewHighs%TotalIssues

NewLows%TotalIssues

HighLowLogicIndex

HighLowValidation

HighLowDifference

NewHighs–NewLows

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thisisthedifferencebetweenthedailynewhighsandnewlows.Ifthenewhighsoutnumberthenewlows,theindicatorwillbeabovethezeroline.Ifthenewlowsoutnumberthenewhighs,itwillbebelowthezeroline.Withoutsomesortofsmoothingorrateofchangeitisaverynoisyoscillator.

Interpretation:Basicallyitcanbeusedasanoverboughtoversoldoscillator,similartotheadvancedeclineoverboughtoversoldindicator.Chart7-1showsthatbysmoothingitby21daystakesoutmuchofthenoiseandthencanbeusedforbullishandbearishsignalsasitcrossesthezeroline.

Chart7-1

AuthorComments:Initsrawformthisisnotuseableotherthantogetafeelforthenumberofnewhighsrelativetothenumberofnewlows.Abetterderivationforthiswouldbetolookatthedifferenceasapercentageoftotalissues.TimHayesofNedDavisResearchgivesthefollowinginformationusingweeklydata.Whenthisweeklyindicatorisabove8.8%itisbullishandwhenitisbelow-3.6%itisbearish.Chart7-2showsHayes’thresholdsalongwithanoverlayforidentifyingbuyandsellsignals.Wheneverthedifferenceisabovetheupper(8.8%)thresholdthevalueis+30andwhenbelowthelower(-3.6%)thresholditis-30.

Chart7-2

Formula:(H–L)

StockCharts.comSymbol:!BINYHLPTDW

References:

Hayes,Timothy.TheResearchDrivenInvestor.McGraw-Hill,2001.

AuthorNote:Thisisagreatbook,butunfortunatelyitisoutofprint.Istronglyrecommenditifyoucanfindacopy.

NewHighNewLowLine

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:TheNewHighNewLowLineplotsthedifferencebetweenthenumberofstockshittingnew52-weekhighsandthosehitting52-weeklowsandthenaddsthatdifferencetothevaluefromthepreviousday.Itisconstructed

liketheadvance-declinelineandcanbeinterpretedinasimilarway.

Interpretation:Whenthespreadbetweenthenumberofnewhighsandlowsiswidening,theNewHighNewLowlineisrising,whichispositive.AnyseriousdivergencebetweentheNH-NLlineandthestockaveragecanbeanearlywarningofapossibletrendchange.Wheneverthiscumulativeline(showninchart7-3)changesdirectionitisanimportantmoveinthemarketthatcannotbeignored.Divergenceofthisindicatorwithpriceisalsoagoodtechnique.

Chart7-3

AuthorComments:Ifthisindicatorchangesdirection,itisimportant.Toremovesomesmallwhipsaws,onecansmoothitwitha21-dayarithmeticaverage.Again,whenthisindicatorchangesdirectionyoushouldpayattention,becausethemarketisalsochangingdirection,asshowninchart7-4.

Chart7-4

Formula:∑(H–L).

NewHighs&NewLowsOscillator

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thisisthedifferencebetweenthenewhighsandnewlows,thenputintoarelationshipliketheadvancesanddeclinesarewiththeMcClellanOscillator.

Interpretation:Chart7-5showsthatthecrossingofthezerolineseemstobeveryeffective.However,itdoesproducetoomanywhipsawstobeusedforanythingotherthanshorttermtrading.

Chart7-5

AuthorComments:IliketheMcClellanconceptoflookingatthedifferencebetweentwodifferentsmoothingsandtendtolikehighsandlowsalittlebetterthanadvancesanddeclines.Keepinmindthatthenewhighsandnewlowshaveamuchdifferentrelationshipwitheachotherthantheadvancesanddeclinesdo.Thisisbecauseofthefactthatanewhighornewlowisbasedupondataoverthelastyear,andadvanceordeclineisbasedonyesterday’sdata.Thisisagoodindicator.GeraldAppellikestosmoothitby10days.Smoothingitby15daysmakesitworkverywell,asshowninchart7-6.

Chart7-6

Whilecreatingtheabovechart,Iaccidentallyputthewrongformulaintheindicatorbuilderandcreatedachartofthe19-dayexponentialaverageofnewhighsminusthe39-dayexponentialaverageofnewlows.Thereseemstobesomemeritinthis;observeinchart7-7howitworksasitcrossesthezeroline.

Chart7-7

Formula:19-dayexp.average(H–L)-39dayexpaverage(H–L).

StockCharts.comSymbol:!BINYHLO,!BINYHLAO,!BINYHLMO

References:

Appel,Gerald,“GeraldAppel,withSystemsandForecasts.”Stocks&Commodities,Volume12,March1994,pp.98-105.

NewHighs-NewLowsDerivations

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thesearetwoindicatorsbasedupontwopopularprice-basedtechnicalindicators,WellesWilder’srelativestrengthindex(RSI),andStochastics(%K).Whilethoseindicatorsusedprice,thesederivationsusethedifferencebetweenthenewhighsandnewlows.

Interpretation:TheRSIversionusesthedifferencebetweentheRSIofnewhighsandtheRSIofnewlows.Liketheprice-basedRSI,intrendingmarkets,thisindicatorisnottellingusmuch.Fromchart7-8wecanseethatcrossingthezerolineseemstoworkbest.ThereisazerolineheresincethisisthedifferencebetweentwoRSIcalculations.Themorecommonprice-basedRSIoscillatedbetweenzeroand100.

Chart7-8

TheStochasticversionofthehighlowdifferencewascreatedthesamewayastheRSIversion.Basicallyadifferencebetweenthestochasticofthenewhighsminusthestochasticofthenewlows.Chart7-9isusinga65-dayperiodforthestochastics.

Chart7-9

AuthorComments:I’mnotsureIhaveaddedanythingtothearsenalofbreadthindicatorsalreadyinexistence,however,theconceptcouldcertainlybefurtherrefined.

StockCharts.comSymbol:!BINYHLRSI,!BINYHLSTO

HighLowRatio

NewHighs/NewLowsRatio

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thisisthenewhighsdividedbythenewlows.Sincethepossibilityoftherebeingadaywithzeronewlows(youcannotdividebyzero–itisundefined),thisindicatormustbesmoothed,bysmoothingtheindividualcomponentsbeforedoingthedivision.

Interpretation:Chart7-10showsthisratiosmoothedwitha21-daysimpleaverage.Mostofthedownspikesarejustaftermarketlows.Whenthemarketisdecliningtherearenotmanynewhighsbeingmade,butonceitstartstorally,newhighscomequickly.Watchingtheupwardmovesforareversalcanassistinidentifyingtops.Also,chart7-10usessemi-logarithmicscalingfortheindicatortobetterreflectthechangesoversuchalongtimeperiod.

Chart7-10

GeraldAppelusesa10daysmoothingasshowninchart7-11.Hestatesthatwhenthisindicatorfallsto30andturnsupitisabuysignal.Whenitgetsabove90,themarketisstrongandwillcontinueforsometime.Hesaysanytimetheindicatorstaysover70,youcanstayinthemarket.

Chart7-11

AuthorComments:Noticetheperiodonchart7-11,nearthe1987crashandhowthisindicatordidnotregistermuchmovement.Why?ThecrashinOctoberwassharpandquick,andrecoveredquickly.Newhighsandnewlowsdatacoverstheprecedingyear.Therewasastrongmarketupmovefrom1984untilthecrashpreventinganynewhighstooccuroffofthe1987crashbottom.Saidalittledifferentlytoensureyouunderstandit,asthemarketralliedoffofthatOctoberbottom,theactiondidnotproducenewhighsbecausethedropwassosharpandquick.

AbrahamCohenfromInvestor’sIntelligence,useda10-dayaverageofnewhighsdividedbythesumofnewhighsandnewlows.ThiswasalsoastablepartofArtMerrill’sandJohnMcGinley’sTechnicalTrendsservice.Chart7-12showsCohen’sversion.

Chart7-12

ArthurMerrilltestedanindicatorthatusednewhighsdividedbythesumofnewhighsandnewlowsusingapercentageoveraten-dayperiod.WiththeusualArthurMerrillthoroughness,testingwasdoneoveraten-yearperiodusingthisindicatorandtheDowIndustrialAverage.Itturnedoutthattheindicatorworkedwellasanoverboughtandoversoldindicationshowinganexcessofnewhighsisbearishandanexcessofnewlowsisbullish.Chart7-13showsthis,butalsoshowsthatlongperiodsofextendedmoveswillkeeptheindicatorinanoverboughtoroversoldarea.Thisistobeexpectedsinceupmovesthatarelongerthan52weekswillcontinuetogeneratenewhighswitheachupday,andsimilarlyfordownmovesandnewlows.IhaveattemptedtoidentifythevalidityofthisthinkingwiththeHighLowValidationIndexlaterinthissection.

Chart7-13

In1993,TimHayes,ofNedDavisResearchsaidthatusingweeklynewhighsisaverygoodleadingindicatorforamarkettop.Asoflate1993,outof14indicatorsthiswasthesecondbestinhistesting.Hestatesthattheweeklynewhighsindicatorwas100%successfulinleadingninebullmarkets,doingsobyamedianof34weeksandwitharangeof71weeks.Itappearsthatthissimpleindicatorcontinuestodowell.Chart7-14showsthis.Thisisnotanindicatorusingtheratio,butjusttheweeklynewhighs.

Chart7-14

ThethirdbestindicatoroutoftheTimHayes’studymentionedabovewasadailyratioofnewhighstothesumofnewhighsandnewlows,smoothedby55days.Hayesclaimsithasabetterrecordthantheadvancedeclineindicators.Determinationofitsignalingamarkettopisdonebyadivergenceintheindicator.Alldivergenceshavebeenidentifiedinchart7-15.Also,Hayessaysthatwhenitisbelow.21,themarketisoversold,again,asshownbythelineinchart7-15.

Chart7-15

Formula:(HL),(H(H+L))

StockCharts.comSymbol:!BINYHLR21,!BINYHLR10,!BINYHLC,!BINYHLM,!BINYHW,!BINYNHH

References:

Appel,Gerald,“GeraldAppel,withSystemsandForecasts.”Stocks&Commodities,Volume12,March1994,pp.98-105.

Merrill,Arthur,1985,TechnicalTrends,MerrillAnalysis.

Merrill,Arthur,“NewHighs/NewLows.”Stocks&Commodities,Volume8,June1990,pp.228-229.

Hayes,Tim,“LeadingIndicesatBullMarketPeaks.”Stocks&Commodities,Volume11,December1993,483-488.

HighLowMiscellaneous

NewHighs&NewLows

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thisismerelytheactofdisplayingboththenewhighsandnewlowsasseparatelines,eacharithmeticallysmoothedby10days.Thismakesitsomewhatsubjectiveandnotgoodfordetailedanalysis,butgoodforageneralpictureofthebreadthofthemarketinaccordancewithnewhighsandnewlows.

Interpretation:Fromchart7-16youcanseethatinnormaltimes,thenewhighsareabovethenewlowsduringmarketrisesandbelowthenewlowsduringmarketdeclines.Thisisasonewouldexpect,solookingfortheearlyreversalofthiswouldpossiblyleadtoturnsinthemarket.Thetwoplotsinthemiddleshowthis;thenewlowsbeingthedottedlineandthenewhighsbeingthesolidline.Inthebottomplot,whenthelineisabovezero,itshowsavalueof+1,andmeansthenewhighsaregreaterthanthenewlows.Ifbelowthezerolineat-1,thenewlowsareabovethenewhighs.

Chart7-16

AuthorComments:Anawarenessofthenumberofstocksmakingnewhighsandnewlowsisanimportantpartofbreadthanalysis.Iprefertoremoveasmuchsubjectivityfromtheanalysisaspossible.Chart7-17isachartshowingthenewhighsandnewlowseachsmoothedbya10periodaverage,thenshowingitas+1whenthenewhighaverageisabovethenewlowaverage,and-1whenthenewhighaverageisbelowthenewlowaverage.

Chart7-17

MikeBurkshowsanunusualwaytodisplaythenewhighandnewlowdata.Newhighswereshownasa19periodsmoothingandnormalizedonascalefromzerotoonehundred.Thenewlowswereshownsimilarlybutwithaninvertedscale.Thismeantthatasnewlowsincreasedtheywoulddescendfromthetopofthechart.Theyshareacommonhighvalue,whetheritisnewhighsornewlows.Also,thenormalizationsareforperiodsofaboutonehundredtradingdays.

Chart7-18showsBurk’schartingconvention.Thenumberofnewlows(dottedline)relativetotherangeofnewlowsoverthelast100dayshelpsidentifymarketbottomswithfairlygoodaccuracy.Thenumberofhewhighs,againrelativetherangeofnewhighsoverthelast100daysshowsmarkettopsbutonlyafterthenumberofnewhighsstartstodrop.

Chart7-18

Formula:(H+L)

StockCharts.comSymbol:!BINYHLXD,!BINYHLX10D,!BINYNHB

References:

Burk,Mike,“NewHighandNewLowIndicators.”Stocks&Commodities,Volume8,May1990,pp.197-198.

NewHighs%TotalIssues

Datacomponentsrequired:NewHighs(NH),TotalIssues(TI).

Description:Probablythebestwaytolookatasingledatacomponentistoputitintoperspectivewitharelated,butmoreglobal,breadthcomponent.Herewetakethenewhighsasapercentageoftotalissues.

Interpretation:Leadinguptoamarkettop,thenumberofnewhighsis

considerablymorethanthenumberofnewlows.Thefirstwarningsigniswhentheystarttobecomeequal.Thisisbecauseasatopisformed,manystocksstopmakingnewhighs,thereisachurningofissuesmakingnewhighswhichkeepthetotalnumberofthemfromdeclining.Oncethetopisinfullswing,thestocksthatpeakedatthebeginningofthetoparenowdroppingandsoonwillbemakingnewlows.Muchofthisisbaseduponhowlongofatoppingprocessithasbeen.Whenthenumberofnewhighsandnewlowsareaboutequal,butstillhavenumbersaround100ormoreofeach,lookout.Chart7-19showsthispercentagesmoothedby21days.

Chart7-19

AuthorComments:AttimesIbelievethatnewhighandnewlowdataisbetterthantheadvancedeclinedataforidentifyingmarkettrendsandturningpoints.Hewhighs,likeadvances,willdrivethemarkethigher.Chart7-20showsthepercentageofnewhighsviewedasarateofchange,andagain,smoothedby21days.

Chart7-20

TimHayes,ofNedDavisResearch,looksatthisindicatorandclaimsthatwhentheweeklynewhighsasapercentageoftotalissuesexceed30%forthefirsttimeinanewyear,itisbullish.Similarly,whentheweeklynewlowsasapercentageoftotalissues,isbelow1.95%,itisbullishandwhenabove7.2%itisbearish.Chart7-21showsthenewhighsinthemiddleplotandthenewlowsinthebottomplotwiththeHayesthresholdsshown.

Chart7-21

Formula:(H/TI)*100

StockCharts.comSymbol:!BINYNHPTI,!BINYNHPROC,!BINYNHHPW

References:

Davis,Ned.BeingRightorMakingMoney.NedDavisResearch,1991.

NewLows%TotalIssues

Datacomponentsrequired:NewLows(NL),TotalIssues(TI).

Description:Thisisthenumberofstockshittinganewlowforthefirsttimeinthelast52weeksrelativetothetotalissuestraded.

Interpretation:Newlowswillshowyouadditionalinformationaboutthehealthofthemarket.Chart7-22showsthiswiththepercentagesmoothedover21days.Asexpectedbecauseofthesharptendencyofthemarketsatbottoms,the

newlowsusuallyspikeatorveryneartothosebottoms.

Chart7-22

AuthorComments:MikeBurkclaimsthatthenewlowsarebestatdefiningcyclesinthemarket,andnotparticularlyusefulfordaytodaytrading.Chart7-23istherateofchangechartsimilartothatusedinthenewhighpercentagesection.

Chart7-23

TimHayesofNedDavisResearchoffersbuyandsellinformationontheweeklynewlowsasapercentageoftotalissues–lookunderNewHighs%TotalIssuesearlierinthissection.

Formula:(L/TI)*100

StockCharts.comSymbol:!BINYNLPTI,!BINYNLPROC

References:

Burk,Mike,“NewHighandNewLowIndicators.”Stocks&Commodities,Volume8,May1990,pp.197-198.

HighLowLogicIndex

Author/Creator:NormanFosback

Datacomponentsrequired:NewHighs(H),NewLows(L).

Description:Thisisanindicatorthatusestworatios:thenewhighsdividedbythetotalissues,andthenewlowsdividedbythetotalissues.TheHighLowLogicIndexusesthelesserofthetworatiosonanygivendayandthenexponentiallysmoothsitby50days.Note:Fosbackusedweeklydataforthisindicatorwitha10-daysmoothing.

Interpretation:Theconceptisthateitheralargenumberofissueswillreachnewhighsorwillreachnewlows,butnormallynotatthesametime.Becausetheindicatorusesthelowerofnewhighsornewlows,alowreadingonthisindicatorcouldindicateastrongtrend.Ifyouthinkaboutit,itissomewhatofaconsensusindicatorbasedonnewhighsandnewlows.Whenitreachesahighreading,itmeansthatthereissomethinginconsistentaboutthemarketanditisnotagoodsign.Chart7-24alsoshowstheindividualnewhighsandnewlows(dottedline)inthemiddleandthehighlowlogicindexonthebottom.ThischartusesdailydataadjustedforFosback’sparameters.Youcanseeinchart7-24thatwhenthemarketistrending,theindicatorisatitslowpoints.

Chart7-24

Chart7-25usesweeklydataaspreferredbyNormanFosback.Closeexaminationofthedailyandweeklyversionsdoesnotyieldmuchdifference.Thisisbecausenewhighandnewlowdataisbaseduponamuchlargertimeframe.

Chart7-25

GeraldAppelusesaslightmodificationtothisindicator.Heusesthelesserofthetworatiosofnewhighstototalissuesandnewlowstototalissues.Becausehealsousedweeklydataforthenewhighsandnewlows,Iadjustedhissellparameterto2.4asshowninchart7-26.Thisversionseemstoidentifytopswhenitrisesabove2.4.

Chart7-26

AuthorComments:Ithinkthattheweeklydatawaseasiertoworkwithwhentherewerenopersonalcomputersandthataccountsforitsuseinsomeofthisolderindicators.Ialsobelievethereisn’tmuchdifferenceinusingweeklydataversusdailydatainregardtonewhighsandnewlowssincetheyarebasedonprices52weeks(252days)ago.IfanissuereachesanewhighonMonday,itmeansitisthehighesthighvalueforthatissueinayear.Iftheweeklynewhighs(Fridayclose)alsoreflectthat,itiswithinlessthan2%ofrepresentingthetimeofthenewhigh.Andthatistheworstcasescenario.Theotherdaysoftheweekareevencloser,withFridaybeingthesameastheweekly.

ThisuniqueconceptissomewhatsimilarinconcepttoWilder’sDirectionalMovement.Thesteadymovesoftheindicatoreitherupordowncanrepresentgoodtrendingmarkets.Lookattheperiodbetween1992and1997(chart7-25),atimeofcontinuousmarketupwardsmovement.Thehighlowlogicindexstayedatlowreadingsmuchofthetime,indicatingthereweremanynewhighs

(ornewlows)beingmade.

IfiguredIwouldreversetheconceptandcreatedtheLowHighLogicIndexasshowninchart7-27.ThisistheoppositeofFosback’sindicatorinthatitusesthehigherofthetworatiosmentionedaboveinsteadofthelower.Settingadecisionzoneat10tellsusthatweareeitheratanewamarkettoporamarketbottom.Thegoodnewsisthatthetrendofthemarketuptothatpointshouldtelluswhichitwillbe.Likeitscomplement,thehighlowlogicindex,itstaysatlowvaluesduringstrongtrendingmarkets.

Chart7-27

Formula:PreviousValue+((HTI)or(LTI)(exponentiallysmoothedby50days).

StockCharts.comSymbol:!BINYHLL,!BINYHLLW,!BINYHLLA,!BINYLHL

References:

Fosback,NormanG.StockMarketLogic,FortLauderdale,FL:TheInstituteforEconomicResearch,Inc.,1976.

Appel,Gerald,“GeraldAppelwithSystemsandForecasts.”StocksandCommodities,Volume12,March1994,pp.98-105.

HighLowValidation

Author/Creator:GregMorris

Datacomponentsrequired:NewHighs(H),NewLows(L),MarketIndex(MKT).

Description:Thisisanattempttohelpvalidatenewhighandnewlowdataand,tobehonest,isstilla“workinprogress.”Ifyouconsiderthefactsrelatingtonewhighsandnewlows,youwillseethenecessityforthis.Anewhighmeansthattheclosingpricereachedahighthatithadnotseeninthelastyear(52weeks).Similarly,anewlowisatalownotseenforatleastayear.Thisindicatortriestoidentifywhenthenewhighornewlowisdeterminedtobegoodorbadusingthefollowinglineofthinking.

Considerthatpriceshavebeeninanarrowrangeforoverayear.Somethingthentriggersaneventthatcausesthemarkettomoveoutofthattradingrangetotheupside.Thiswillimmediatelycausealmosteverystockthatmoveswiththemarkettoalsobecomeanewhigh.Newhighsaregenerallytheforcethatkeepsgoodupmovesgoing.Thenewlowsinthisscenariowilldryup,asexpected.Nowconsiderthatthemarkethashadasteadyadvanceforquitesometime.Thenumberofnewhighswillgenerallycontinuetoremainhighasmoststockswillrisewiththemarket.Ofcoursetherewillbedropsasthemarketmakesitcorrectionsonitspathtohigherprices.Whenthenumberofnewhighsstartstodryup,youwillprobablynoticethatthenumberofunchangedissuesstartstoincreaseslightlybecausealotofstockswilljustceasetoparticipateinthecontinuingrise.Newlowswillnothappenforsometimebecausethemarketisjuststartingtoformatop.Thenumberofnewlowswillincreaseasthemarketformsitsbroadtop,whilethenumberofnewhighsgetssmallerandsmaller.Itwillbethetimeframeofthistoppingactionthatdetermineswhenthenewlowswillstarttokickin.Remember,youcannothaveanewlowuntilanissueisatanewlowpriceoverthelastyear.

Whenthemarketdeclinesandyoustarttoseefewernewlows,itmeansthemarketislosingitsdownsidemomentum.Whyisthisso?Itisbecausesome

issueshavealreadybottomedandarenotcontinuingtomakenewlows.Thisistiedtotherotationaleffect,sometimescausedbyvariousmarketsectorshittingbottomsatdifferenttimes.

Interpretation:Chart7-28isanattempttoshowthisvisually.Upspikes(solidgreenline)equalto+2representgoodnewhighs.Upspikes(shortergreenline)equalto+1representbadnewhighs.Similarly,downspikes(solidredline)at-2equatestogoodnewlowsand-1(shorterredline)equatestobadnewlows.Youmightreadthatagainsinceitisnotobvious.Iwantedtokeepthenewhighsastheupspikesandthenewlowsasthedownspikes.Shortupspikesarebadnewhighsandshortdownspikesarebadnewlows.Bad,inthiscasemeanstheydidnotconformtothetheorytalkedaboutabove.

Chart7-28

AuthorComments:Thismethodoftryingtodeterminewhenthenewhighsandnewlowsaretrulygoodones,involvestherateofchangeofthemarket,asmoothedvalueofeachcomponentrelativetothetotalissuestraded,andtheir

relationshipwitheachother.Forexample,ifthemarketisinarally(rateofchangehigh)andthenewhighsareincreasing,anynewlowsthatappeararenotgoodones.

StockCharts.comSymbol:!BINYNHVD,!BINYNLVD

CH 8 - Up Volume Down VolumeIndicatorsThebreadthindicatorsinthissectionutilizeeitherupvolume,downvolume,orbothintheircalculation.Pleasedonotconfusethiswiththeplethoraoftechnicalindicatorsthatusetotalvolume.

UpVolumeandDownVolumeIndicators

UpVolume

DownVolume

ChangedVolume

Up&DownVolume

McClellanOscillator–Volume

McClellanSummationIndex–Volume

MerrimanVolumeModel

SwenlinITVolumeMomentumOscillator

SwenlinTradingOscillator–Volume

UpVolumeDownVolumeLine

CumulativeVolumeRatio

UpDownOnBalanceVolume(OBV)

VolumePercentageRatio

Upside–DownsideVolume

Upside/DownsideVolumeRatio

ZweigUpVolumeIndicator

UpVolume

Datacomponentsrequired:UpVolume(UV)

Description:Thisisthetotalamountofvolumethatisintheadvancingissuesonadailybasis.

Interpretation:Byitself,itisanoisynumberandalmostunusable,however,smoothingitby21daysgivessomeinterestinginformationaboutthemarket.Volumegenerallyprecedesmarkethighs.Manysaythattheupvolumefuelsthemarket’srise.Ifthissmoothedindicatorisnotmakingnewhighswiththemarket,beonthealert.Chart8-1isthe21-daysmoothoftheupvolume.

Chart8-1

GeraldAppellikestolookatupvolumesmoothedover10days.Hesaysthatifthemarketmakesanewhighandtheupvolume(10-dayaverage)doesnotalsomakeanewhighwithinaboutsixweeks,bealertforamarkettop.LeighStevenssaysthatupvolumeisatruetestofbuyinginterest.Healsousesa10-

dayaverageofupvolumeforhisanalysis.Hewatchesabaselineinupvolumewhichisat525–550millionshares.Themid-pointofhisrange(537million)isshownonchart8-2.Clearlywhenthatwaswritten,thevolumehasincreaseddramaticallyandisnolongervalid.

Chart8-2

AuthorComments:JohnMcGinleylikedtouseupvolumeasapercentageoftotalvolumewithathree-weekaverage.Hisreasonwasthatupvolumewasthemotorofthemarket;withoutitthemarketwilldrop.Inorderforthemarkettojustremaineven,itmusthaveupvolume.

Ithinkdetrendingadatasetsuchasthisisbetterthanlookingattherawdata,evenifitissmoothedasintheexamplepriortothis.Chart8-3showstheupvolumerelativetoits21-dayaverage,withtheresultsfurthersmoothedby10days.Youcanspotperiodsofstrongupvolumeassociatedwithgoodupmarketmoves.However,oncethemarketstartstoweaken,thisindicatorturnsaroundquickly.Itdoesnotmeantheupmoveisover,butthegoodstrongupvolume

associatedwithitsinitiallaunchisnolongerpresent.Keepinmindthataslongasthisindicatorisabovethezerolinetheupvolumeisstillaboveismovingaverage.Alongertermmovingaveragewouldavoidmanyofthewhipsawsbutwouldreducethetiming.

Chart8-3

Formula:UV

StockCharts.comSymbol:!BINYUV21_10

References:

Appel,Gerald,“GeraldAppel,withSystemsandForecasts.”StocksandCommodities,Volume12,March1994,98-105.

Stevens,Leigh,“SpottingIndexTopsandBottoms.”StocksandCommodities,August2004,pp23-26.

DownVolume

Datacomponentsrequired:DownVolume(DV).

Description:Thisisthetotalvolumeofallissuesthatdeclinedinpricefortheday.

Interpretation:Whiletherearenopopularwaystousethis,itseemsthatitshouldbeusedwhenthemarketisinadowntrendasitwillassistyouinidentifyingwhenthatdowntrendmightend.Thedownvolumeshouldstarttodecreaseasthesellingabates.Asamarketstartstobottom,thedownvolumewilldecreaserelativetototalvolume.Chart8-4showsthedownvolumesmoothedbya10-dayaverage(dottedline).Thepeaksinthisindicatorpointoutmostofthemarketbottoms.

Chart8-4

AuthorComments:Usingrawdata,eventhoughitissmoothedisnotasgoodasusingtherawdatarelativetoasmoothedvalueofit.Thisiscalleddetrending.

Chart8-5isshowingthedownvolumerelativetoits21-dayaverage,withtheresultfurthersmoothedby10days(thesamethingthatwasdonewiththeupvolumeintheprevioussection).

Chart8-5

Formula:(DV)

StockCharts.comSymbol:!BINYDV21_10

ChangedVolume

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Thisrepresentsallthesharesonaparticularexchangethatchangedinpricefortheday.Itincludestheupvolumeandthedownvolume.Totalvolumeisdifferent,inthatitincludestheunchangedissuesvolume.Youcouldalsosubtracttheunchangedvolumefromthetotalvolumetoarriveatthesamevalue.

Interpretation:Thevolumeusedhereistheactivevolumefortheday.Becauseofdecimalization,thisindicatorneedstobelookedatinstages,similartotheunchangedissues.Decimalizationcausedagiantdecreaseinunchangedissues,sothiswouldcauseagiantincreaseinthechangedoractiveissues.Chart8-6showsthisindicatorsince1996toshowthedecimalizationthatoccurredinJanuary,2001.

Chart8-6

AuthorComments:Onemightbeabletotiethistothefactthatasmarketsstarttheirtoppingprocess,thenumberofunchangedissuesshouldstarttoincrease.Iftheunchangedvolumeincreasesthiswouldassistandalsohelptoconfirmit.Therefore,ifthechangedvolumeweretodecreasethismightofferthesameinterpretation.Thiscouldbeconstruedtobemoreimportantthantotalvolumebysome.

Formula:(UV+DV).

StockCharts.comSymbol:!BINYCV21

Up&DownVolume

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Achartshowingtheupvolumeanddownvolumeonthesameplotwilltellalotaboutwherevolumeisflowing.Smoothingeachofthemwillmakeitmucheasiertouseandinterpret.

Interpretation:Inchart8-7,theupvolumeisthesolidlineandthedownvolumeisthedottedline.Youcanseehowtheupvolumegenerallyincreasesduringupmovesandthedownvolumeincreasesduringdownmoves.Thisisnormalmarketactionandistobeexpected.Itisthedeviationfromthisthatyouneedtowatchfor.

Chart8-7

AuthorComments:Youcanseethatasamarketdropsinprice,thedown

volumesteadilyincreasesandpeaksrightatthemarketbottom.Justafterthemarketbottom,upvolumerisesquicklyandcontinuestodominatethroughouttheupwardmove.Youcanalsoseethatevensmallcorrectionsinthemarketwillcausetheupanddownvolumetoreactsignificantly.Trendsinthemarketareshownwhenoneofthelinesremainsaboveorbelowtheotherforextendedperiodsoftime.

Formula:(UV),(DV)

McClellanOscillator–Volume

Author/Creator:ShermanandMarianMcClellan

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:ThisistheMcClellanOscillatorbutinsteadofusingadvancesanddeclinesdata,upvolumeanddownvolumedataareused.Thecalculationisexactlythesame,onlythedatacomponentsarechanged.

Interpretation:Usingtheanalogythatvolumeprecedesprice,theMcClellanOscillatorusingupanddownvolumeshouldbeusedinthesamemannerastheadvancedeclinebasedMcClellanoscillator.Lookforextremereadingstowarnagainstmarketturningpoints.Keepthisinmind:themarketcannotgoupinahealthywaywithoutgoodaccompanyingupvolume.Itcancertainlyfallmucheasier.TrendlineanalysisoftheMcClellanOscillator-Volumeisalsoagoodtechniquewhenusingthisindicator.Chart8-8showstheMcClellanOscillator-Volume.

Chart8-8

AuthorComments:Fromchart8-8,itappearsthatwatchingthisindicatorasitcrossesfrombelowtoabovethezerolinewillalmostnailthemarketbottoms,includingthosethatarejusttradingrallies.Thisisprobablybecausechangesinthemarketaremorequicklyreflectedintheupanddownvolume.

TheMcClellanVolumeOscillatoralsohasimportancewhenonecomparesittotheMcClellanAdvanceDeclineOscillator.Whenthetwodisagree,suchasifonemovesabovethezerolinewhiletheotherdoesnot,itisusuallytheVolumeOscillatorthattellsthetruerstory.Volumeisnotalwaysthecorrectone,butthatisthetendencyandanydisagreementisasignfortheanalysttobeconcerned.

VolumealsodiffersfromAdvanceDeclinenumbersinthatVolumenumbersaretheoreticallylimitless,whereasthedifferencebetweenAdvancesandDeclinescanneverbegreaterthanthenumberofissuestraded.Bigvolumetradingdayscanthereforehaveabiggerimpactonvolumebreadthindicatorslikethe

McClellanVolumeOscillator.Conversely,smallvolumedayslikethedayafterThanksgivingcanhaveonlyaminimalcontributiontochangingthevolume-basedoscillator,whiletheAdvanceDeclineOscillatordoesnotknowthedifference.

MythanksgotoTomMcClellanwhoreviewedthissectionandthefollowingoneontheMcClellanSummationIndex–Volume.

Formula:(Today’s19exp.averageof(UV–DV)–(Today’s39exp.averageof(UV–DV)StockCharts.comSymbol:!VMCOSINYA

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

McClellanSummationIndex-Volume

Author/Creator:ShermanandMarianMcClellan

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:LiketheMcClellanOscillatorthatusesvolume,thisistheMcClellanSummationIndexusingupvolumeanddownvolumeinsteadoftheadvancesanddeclines.Thecalculationsareidentical,justthebreadthcomponentshavechanged.

Interpretation:AswiththeMcClellanAdvanceDeclineSummationIndex,theVolumeSummationIndexindicatestheprevailingtrendforthemarketbaseditsdirectionofmovement.Italsomakesforaniceintermediatetermoverbought/oversoldindicatorwhenitreachesextremevalues.TheMcClellanVolumeSummationIndexisshowninchart8-9.

Chart8-9

AuthorComments:Becauseofthelargeincreasesindailytradingvolumeovertheyears,makingaratioadjustmentofthedailyUpandDownVolumefiguresisevenmoreimportantthanfortheA-Dnumberswhentryingtomakelong-termhistoricalcomparisons.TheMcClellansdothisadjustmentinthesamewayforVolumethattheydoforAdvanceDecline,bydividingtheUpDownVolumedifferencebythetotalofUpplusDownVolume.Theonedrawbackisthatthisequalizesalltradingdays,sobigorsmallvolumedaysdonothavethesameimpactthattheywouldintherawcalculations.

Formula:ThisistheaccumulationofthevolumebasedMcClellanOscillator.

VOLSUMTODAY=VOLSUMYESTERDAY+VOLOSCTODAY

StockCharts.comSymbol:!VMCSUMNYA

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

MerrimanVolumeModel

Author/Creator:PaulMerriman

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Thisisasimplebuteffectiveindicatorthatusestheupanddownvolumeasaratio.Onelooksforextremelevelstodeterminemarketstrengthorweakness.MerrimaninitiallycreatedthisindicatorusingtheupanddownvolumefromtheNasdaqmarket.

Interpretation:Whenthesumoftheupvolumeoverthelasteighttradingdaysdividedbythesumofthedownvolumeoverthelasteightdaysisgreaterthan1.5,abuysignalisgenerated.Asellsignaliswhentheeight-dayratioofthesumsisequalto0.8.Merriman’slogicissimple,inanupmarketyoucanexpectmoreupvolumeandinadownmarketyoucanexpectmoredownvolume.Chart8-10istheindicatorusingNewYorkbreadthdata.Ignorerepetitivesignalsinthechart.

Chart8-10

AuthorComments:PaulMerrimanhascreatedafairlysimplebutreliableindicatorfordeterminingmarketturnsbaseduponvolume.WhileheoriginallyusedNasdaqdata,theuseofNewYorkdataseemstoworkjustaswell.

Formula:8-daysumofUV/8daysumofDV

StockCharts.comSymbol:!BINYMVD

References:

Merriman,Paul,www.fundadvice.com/modelsexplained.html.

SwenlinITVolumeMomentumOscillator

Alsoknownas:ITVM

Author/Creator:CarlSwenlin

Datacomponentsrequired:UpVolume(UV),DownVolume(DV),TotalVolume(V).

Description:TheIntermediateTermVolumeMomentumOscillatorisabarometerofbreadth.TocalculatetheITVMaddthedailyMcClellanOscillator-Volume(ratioadjustedusingthedifferenceofupanddownvolumedividedbythetotalvolume)tothedaily39-dayexponentialaverage,thencalculatea20-dayexponentialaverageoftheresult.

Interpretation:CarlSwenlinoffersthefollowingcomments:Itisbetterifthisindicatorisabovezerolineandrising.Belowthezerolineandfallingistheworstscenario.Risingisbetterthanfalling,evenifbelowthezeroline.JustliketheMcClellan’sversionwithvolume,thisisCarl’svolumeversionofhisIntermediateTermBreadthMomentumOscillator.Chart8-11showstheITVM.

Chart8-11

AuthorComments:Theindicatortroughsseemtopinpointmarketbottomsand

thepeakspointoutthelossofupsidemomentum.

StockCharts.comSymbol:!ITVMNYA

References:

Swenlin,Carl,www.decisionpoint.com.

SwenlinTradingOscillator–Volume

Alsoknownas:STO-V

Author/Creator:CarlSwenlin

Datacomponentsrequired:UpVolume(UV),DownVolume(DV),TotalVolume(V).

Description:TheSwenlinTradingOscillator–Volumewasdesignedforshort-termtrading.Itisa5-daysimplemovingaverageofa4-dayexponentialaverageofthedailyupvolumeminusdownvolumedividedbythetotaldailyvolumetimes1000.

Interpretation:CarlSwenlinoffersthesecomments:Thedoublesmoothingoftheshort-termdataresultsinareliableoscillatorthatpersistsinonedirection,usuallytopsnearshort-termmarkettops,andbottomsnearshort-termmarketbottoms.Aswithmostindicators,theprimarytrendofthemarketwilldeterminehowyouwillusetheindicator.Inabullmarket,thetopswillnotbeveryreliable.Inabearmarket,thebottomswillnotbeveryreliable.Chart8-12showstheSwenlinTradingOscillatorforVolume.

Chart8-12

AuthorComments:Youcanseethatthisindicatorwillgenerallycrossthezerolineafteramarketmakesatoporbottom,butwillnotbefarbehindit.

StockCharts.comSymbol:!STOVNYA

References:

Swenlin,Carl,www.decisionpoint.com.

UpVolumeDownVolumeLine

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:TheUpVolumeDownVolumeLineisavariationoftheadvancedeclinelineconcept,exceptthatitusesupanddownvolumeinsteadofadvancesanddeclines.

Interpretation:Thisindicatorcanbeusedthesamewayastheadvancedecline

line.Lookfordivergencepatternswiththemarket.Usingtrendlineanalysiswillalsohelpyouidentifymarketturningpoints.Chart8-13showstheUpVolumeDownVolumeLine.

Chart8-13

AuthorComments:DickArmswouldtellyouthatthisisamuchbetteradvancedeclinelinebecauseitincorporatesvolume.Volumedrivesthemarketandthisindicatorwillcertainlyhintatwhenabullishrunisending.

Formula:∑(UV–DV).

CumulativeVolumeRatio

Author/Creator:JohnC.Lawlor

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Thisisanindicatorthatsumstheupvolumeforthelast50daysand

dividesitbythesumofthedownvolumeoverthelast50days.

Interpretation:Thiswillindicatethemomentumofvolumeoverapredeterminedtimeperiod.Forexample,ifthenumberofdaysusedis50,andtheratioisequalto4,itmeanstherewasanaverageof4timesasmuchupvolumeastherewasdownvolumeoverthelast50days.Likewise,ifthevalueoftheratio(upvolume/downvolume)over50days,is-3,itmeansthat3timesmoredownvolumethanupvolumeoccurredduringthattimeframe.Onecanalsoseefromchart8-14thatdivergencewithpriceseemstobeanearlyindicatorofmarketdirection.

Chart8-14

AuthorComments:LawlordevelopedamethodologyinwhichheidentifiedcyclicalityintheCumulativeVolumeRatio.Thisseemedtobemoreprevalentwhenusingtheratioovera10-dayperiod.Whilenotpreciseinidentifyingsignificanttopsandbottoms,itdidseemtoshowshorttermpricepeakswithsomeconsistency.Chart8-15isshownwitha10periodratioandits10period

cyclicality(dottedsinewave).

Chart8-15

Formula:PreviousValue+(UVfor50days/DVfor50days)

StockCharts.comSymbol:!BINYCVR50,!BINYCVR10

References:

Lawlor,John,“CumulativeVolumeandMomentum.”Stocks&Commodities,February1988,pp.67-69.

UpDownOBV

Author/Creator:GregMorris

Datacomponentsrequired:UpVolume(UV),DownVolume(DV)MarketIndex(MKT).

Description:ThisisauniquetakeofffromJosephGranville’sOnBalanceVolume(OBV).OnBalanceVolumeaddedtheday’svolumewhentheclosingpricewashigherthanthepreviousdayandsubtractedthevolumeforthedaywhentheclosingpricewaslowerthanthatofthepreviousday.TheUpDownOBVusesasimilarconceptofdeterminingthechangeinclosingprices,butusesUpVolumeifthecloseishigherandDownVolumeifthecloseislower.Thedailyvaluesareaccumulatedsimilartothewaytheadvancedeclinelineiscalculated.

Interpretation:ItwouldseemthatincreasesinUpVolumeassociatedwiththepriceclosingupwouldcausethisindicatortoreflectmovesinthemarketinanexaggeratedsense,andsimilarlyondownmoves.Chart8-16showsthatitseemstoreflectmarketactionmuchlikeGranville’sOBV.

Chart8-16

AuthorComments:Thisisadifficultonetointerpretandonehastobecarefulnottoreadtoomuchintothesetypesofindicators.Inchart8-17youcansee

that,similartoGranvilles’OBV,youcanspotdivergenceswithprice.

Chart8-17

Ithinkusingthisasanoscillatorwouldproducebetterresultsandoffermoreinterpretivevalue.Chart8-18istheUpDownOBVOscillatorandwhenreferringtothepeaksandtroughs,italignswellwiththemarket.ThisistheUpDownOBVwitha21-dayrateofchange.Upmarketswillkeeptheindicatorabovethezerolineanddownmarketswillkeepitbelowzero.

Chart8-18

StockCharts.comSymbol:!BINYMVOBVand!BINYMVOBVOSC

VolumePercentageRatio

Author/Creator:MikeBurk

Datacomponentsrequired:UpVolume(UV),DownVolume(DV)TotalVolume(V).

Description:Thevolumepercentageratioisa19periodexponentialaverageofthedownvolumeasapercentageofthetotalvolumesubtractedfroma19periodexponentialaverageoftheupvolumeasapercentageofthetotalvolume.

Interpretation:Burkstatesthatvolumeisbestusedasaconfirmingindicationofthemarket.WhenviewingaplotoftheVolumePercentageRatiosuchasinchart8-19,itistherelativepositionthatisimportantandnottheactualvalues.Burkalsosaysthatitisbestusedasashorttermindicator,usuallyoverperiods

of50to75days.

Chart8-19

AuthorComments:ItseemsthattheVolumePercentageRatioisfairlygoodacallingmarketbottoms,butofferslittleincallingtops.Ofcourse,thatfallsinlinewithmostshorttermindicatorsandisnotsurprising.

Formula:19exp.avg.(UV%TV)–19exp.avg.(DV%TV)

StockCharts.comSymbol:!BINYVPR

References:

Burk,Mike,“VolumePercentageRatio.”Stocks&Commodities,Volume7,December1989,pp.453-455.

Upside-DownsideVolume

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Thisiscalculatedthesameastheadvancesminusdeclinesexceptusingupvolumeanddownvolume.Also,anyvariationsofthoseindicatorswouldapplyhere.

Interpretation:Chart8-20showsthatitisgenerallybestifsmoothedandusedasitcrossesthezeroline.Inchart8-20theupdownvolumedifferenceissmoothedby21days.

Chart8-20

AuthorComments:Tobehonest,Idonotfindmuchinthewayofimportanceofdifferencewiththisone.Sincethisbookisthecompleteguide,ithastobehere.

Formula:(UV–DV)

Upside/DownsideVolumeRatio

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:Thisistheratioofupvolumetodownvolume(upvolumedividedbydownvolume).

Interpretation:Chart8-21showsthatspikestotheupsiderepresentupvolumethatissignificantlymorethandownvolume.Rememberthataratioofpositivenumberswillalwaysyieldapositivenumber.

Chart8-21

AuthorComments:WilliamO’Neil,founderandpublisherofInvestor’sBusinessDaily,mentionstheupside/downsidevolumeindicatorinhisbook,“HowtoMakeMoneyinStocks.”Hestatesthatanimpendingupturninthemarketoccurswhen,afteradeclineof10-12%,whilethemarketcontinuestodrop,theupside/downsidevolumewillstarttoshift.

LarryMcMillan,authorofnumerousbooksonoptions,usesa50-daysumofupvolumedividedbya50-daysumofdownvolume.Larrysaysthatiftheratioisgreaterthan3.0,itisexcellentvolume,ifgreaterthan2.0,itisverygood

volume,1.0isneutral,lessthan0.8ispoor,andlessthan0.5isterrible.Thisratioattemptstomeasurewhetherstocktradersareparticipatingwithgoodbuyingvolumeondaysthatthemarketisup.WhileLarryusesthisprimarilyonindividualstocks,chart8-22showstheupsidedownsidevolumeusingthedatafromtheNewYorkStockExchange.

Chart8-22

AnotherversionofupanddownvolumewaswrittenaboutbyDennisPeterson,afrequentcontributortoStocksandCommoditiesmagazine.Thisversionusesathree-daysumoftheratioofupvolumetochangedvolume(upvolumeplusdownvolume)andthendividedby3.Thedivisionservesnorealpurposeotherthantoreducethelargescalingnumbers.Peterson’sversionisshowninchart8-23.

Chart8-23

Formula:(UV/DV)

StockCharts.comSymbol:!BINYMUDVRand!BINYPUDV

References:

O’Neil,WilliamJ.,HowtoMakeMoneyinStocks.McGraw-Hill,1988.

McMillan,Larry,www.theoptionstrategist.com.

Peterson,Dennis,“MarketBreadth:Volume.”StocksandCommodities,Volume19,February2001,pp.57-60.

ZweigUpVolumeIndicator

ShowZweigDouble9DownVolumeRatioandZweigDouble9Upvolumeratio.

Author/Creator:MartinZweig

Datacomponentsrequired:UpVolume(UV),DownVolume(DV).

Description:ThisisanotherofDr.MartinZweig’smomentumindicators.Thisoneusesaratioofupvolumeanddownvolume.Thisratioshowsthepowerfulthrustofthemarketandcannotbeignored.

Interpretation:Whenevertheratioreaches9to1,agoodbuyingopportunityexists.Therehavebeenmanysignalsgivensince1965.ThebiggestratioeverwasonAugust17,1982,thebeginningofan18-yearbullmarket.Thechartbelowshowseachoccurrenceofthe9to1upvolumeratiosincelate2007,identifiedbythedownspikesthatgodownto-9.Youwillnoticeinchart8-24thattheygenerallyhappennearsignificant,certainlytradable,marketbottoms.

Chart8-24

AfurtherconceptfromDr.Zweigistoexpandthe9to1ratioofupvolumetodownvolumetostatethatanytimetherearetwosignalsinany3-monthperiod,

theevidencesuggestsastrongmarkettofollow.Noticeinchart8-25thatthese“doublenine”signalsareafterthemarketbottoms.Theyareidentifiedasthelongerofthedownspikesandgodownto-18,whereasthedownspikesthatgodownonlyto-9aretheregularonesmentionedearlier.Thelongerdownspikesarethesecondofthe9-to-1ratiostooccurina3-monthperiod.Theywon’tbegoodmarketbottomsignals,butwillgiveyouanopportunitytogetonboardastrongmarket.Theyarealmostconfirmationthatagoodupwardmoveisunderwayandconsideredasacontinuationofthefirst9-to1downspike.

Chart8-25

AuthorComments:Itookhisconceptonestepfurtherandidentifiedallthedownvolumedaysinwhichthedownvolumewas9timesgreaterthantheupvolume.Thereweremanymoresignalsforboththeregular9to1ratioandalsothe“doublenine”signals.Chart8-26showsthedoubleninesignalsasthedownspikesthatgodownto-18andtheregularnine-to-oneratiosaretheshorterdownspikes(dottedlines).TheOctober19,1987“BlackMonday”market

plungedistortsthechart,becausetherewasover500timesmoredownvolumethatupvolumeonthatday.Thatisthereasonchart8-26doesnotdisplaydatabacktothatdate.Afterstudyingthisdataforsometime,Ithinkitisbesttokeepitinthe“nicetoknow”category.Idonotseeanytradingopportunitiesorinvestingstrategiesthatcanmakeuseofthis.Whenyouthinkaboutit,downvolumeinexcessisusuallyfrompanicsituations,manytimestheyarenearmarketbottomsasitisduringcapitulation,butmostlyduringonlyonedaypanics.Thedownvolume9-to1ratioscouldbethefirstindicationthattheensuingrallymightbeagoodone.

Chart8-26

StockCharts.comSymbol:!BINYZUDVRD,!BINYZD9UDVRD,!BINYZD9DUVRD

References:

Zweig,MartinE.WinningonWallStreet.NewYork:WarnerBooks,1986.

CH9-CompositeIndicatorsThebreadthindicatorsinthissectionutilizedifferentcategoriesofbreadthcomponentsfortheircalculation.Someuseallbreadthcomponents,andsomeuseonlytwoorthreecomponents.

CompositeIndicators

ArmsIndex

ArmsOpenIndex

BretzTRIN-5

CashFlowIndex

CompositeTapeIndex

DysartPositiveNegativeVolume

EliadesNewTRIN

HallerTheory

HindenburgOmen

MarketThrust

McClellanOscillatorwithVolume

McClellanSummationIndexwithVolume

MeyersSystems

MovingBalanceIndicator

TechnicalIndex

TitanicSyndrome

TrendExhaustionIndex

Arms’Index

Alsoknownas:TRINandMKDS

Author/Creator:RichardW.Arms

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV)

Description:TheArmsIndex(TRIN)istheratiobetweenadvancingissuesanddecliningissuesdividedbytheratiobetweentheupvolumeandthedownvolume.Saiddifferently,itistheratioofthevolumeofdecliningstocksdividedbythevolumeofadvancingstocks.Arisinglineabove1.0reflectsmorevolumeindecliningissuesandisnegative.Afallinglinebelow1.0reflectsmorevolumeinrisingstocksandispositive.TheArmsindextrendsintheoppositedirectionofthemarketandisconsideredaninverseindicator.

SpecialTreat:IaskedmygoodfriendDickArmsifhewouldwriteashortpieceforthisbookaboutwhathisthoughtprocesswaswhencreatingtheArmsIndex.Thenexttwoparagraphsarefromthemanhimself.ThanksDick.

TheArmsIndexwasmyfirstinventioninalongcareerofdevelopingtechnicalmethodsovertheyearsandwritingabouttheminmysixbooksontechnicalanalysis.Itwaswaybackin1967,andIwasayoungretailbrokerforthenowdefunctfirmofEFHutton.Wehadjustmovedintoanewmodernofficewiththelatestinquotationequipment.Thosemachinesoneverydeskallowedonetosee,onatinyscreen,thefourfactorsthatmakeuptheindex:Advances,Declines,AdvancingVolumeandDecliningVolume.Itseemedlogicaltometocombinetheseinanequationthatwouldanswerthequestion:“Aretheadvancingstocksgettingtheirfairshareofthevolume?”Imerelywrotethemdownastheyappearedonmyscreenandmadeeachafraction.Istartedbycalculatingthefirstratio,thenthesecondratio,andthenthecomparisonofthetworatios.

AfterafewweeksofplayingwiththeresultsIshowedittoaprominentanalystintheNewYorkoffice,NewtonZinder.HeshoweditaroundtoothersandbeforelongBarron’shadmewriteanarticleaboutit.Fromthenonittookonalifeofitsown,andIwentontodevelopotherthingssuchasEquivolumeChartingandnowArmsCandlevolumecharting.ThebeautyoftheArmsIndexisthatitissomuchbaseduponthecoreforcesofthemarketplacethatno

matterhowcloselyfolloweditself-adjustsandcannot,therefore,self-destruct.ItwasoriginallycalledTRINbecausethefirstuserswerecallingittheTrader’sIndex.ThankstotheeffortsofmanyothertechnicalanalystsupportersitisnowgenerallycalledtheArmsIndex.

ThanksDick

TRINcamefromitsoriginalnameofShortTermTRadingINdex.Whencomputerscamealongandeveryonestartedattachingtheirnamestotheircreations(appropriatelyso),itwaschangedtoArmsIndex.ThefirstknownwritingonitappearedinBarronsin1967.

Interpretation:NewtonZinder,ofE.F.HuttonandCo.hasidentifiedthebullishnessoftheArmsIndexwhentwoconsecutivedayshadreadingsof2.0orgreater.Toproducelevelslikethistheremustbealargenumberofdeclinescomparedtoadvances,plusthosedeclinesmustgarnermostofthevolumeforthatday.Itrepresentsalmostapanictypeofsellingfortheday.

Chart9-1istheArmsIndexinitsbasicform.AlineisdrawnatanArmsIndexvalueof2.0,showingtheextremelevelsoflargevolumegoingintodecliningstocks.Rememberthatthisisaninverse(upsidedown)indicator.Youcanquicklyseethatitisvolatileanddifficulttointerpretinthisbasicform.ThefollowingdifferentwaystochartandusetheArmsIndexwilladdsignificantlytoitsmerit.

Chart9-1

RichardArmshasstatedthatheusesa21-daysmoothingforintermediateforecastsand55daysforlongertermuse.In1991,RichardArmstalkedaboutanoscillatorusingthe21-daysmoothingandthe55-daysmoothingoftheArmsIndex.Wheneverthe21-dayaveragedroppedbelowthe55-dayaverage,itwasgivingabuysignal(remember,thisisaninvertedindicator),andwheneverthe21-dayaveragewentabovethe55-dayaverage,asellsignalwasgenerated.RichardArmscalledthisindicatorthe“CrossYourArms”indicator.Armsfurtherrefinedhisuseofthisindicatorbysuggestingthatyouuseitasanintermediatetermmarketdirectionindicator,andwhenitisbullishlookforbuysonly.Likewise,ifitisbearish,lookonlyforsellingopportunities.Alotliketheoldsaying–don’tfightthetape.AlittleknownfactisthatRichardArmspreferredexponentialsmoothinginsteadofarithmetic.ThomasAspraywroteaboutsuchanoscillatorbutuseda10-dayaverageanda30-dayaverageforhisindicator.The“crossyourarms”indicatorisshowninchart9-2.

Chart9-2

AnotherofArms’usesofhisindicator,theArmsIndex,istoplota4-dayaverageofitandputBollingerbandsarounda13-daysimpleaverage.Hestatesthatitisveryshort-termandonlyusedfortrading.Whenitmovesoutsidethebandsasignalisgiven.Again,keepinmindthatthisisaninverseindicator,sowhenitbreaksoutofthetopbandabuysignalisgivenandwhenitbreaksoutbelowthebottomband,asellsignalisgiven.Chart9-3showsthismethod,withtheBollingerbandsbeingtheredlines.

Chart9-3

StevenAchelis,founderofEquisInternational,suggestsusinga4daymovingaverageforshorttermwork,a21daymovingaverageforintermediatetermwork,anda55daymovingaverageforlongtermwork.ThesevaluesareinlinewithArms’suggestions.YoucanseeaplotoftheArmsIndexwitha21-daysmoothinginchart9-4.Trendlinesareshownpointingoutsomeobviousdivergenceswiththemarket.

Chart9-4

Noticeintheprecedingcharthowitbuildshigherandhigherduringthetoppingprocessofthemarket.ThisisbecausetheArmsIndexisnotatrueratio,inthatittheoreticallyhasnolimittotheupside,butcannotgobelowzeroonthedownside,givingitanupsidebias.Smoothingitwillnotchangethisbias.Anotherpopularwaytointerpretthisindicatoristoconstructa10-daymovingaverageofitsdailyvalues.A10-dayArmsIndexover1.20isoversold;a10-dayArmsindexbelow.80isoverbought,asshowninchart9-5.Afurtherenhancement,whichisstrictlyvisualappeal,istoinverttheindicatorsothatupisbullishanddownisbearish,whichismoreinlinewithmostindicators.Thiscaneasilybeaccomplishedbydividing1bytheindicator.IfyoudothisthentheArmsIndexover1.20isoverboughtandwhenbelow.80,itisoversold.Youcanquicklyseethatusingthisasatradingtoolwillgenerateentirelytoomanyfalsesignals.Ijustprefertomonitorittokeepamentalfocusonwherethevolumeisgoing,intoadvancingstocksordecliningstocks.Ingeneral,becauseofswingsinmarketsentiment,theArmsIndexcanbebullishwheneither

overboughtoroversold.ItistherapidchangeinsentimentthatforcestheArmsIndextoswingtoextremes.

Chart9-5

In1987,JamesAlphierandBillKuhnwroteanarticleinStocks&CommoditiesmagazineafteracomprehensivestudyofthemarketusingadailyArmsIndexreadingof2.65orgreater.TheyshowedtheperformanceoftheS&P500Index3,6,9,and12monthsaftertheArmsIndexgavea2.65reading.AcursoryglanceattheirtablerevealedthatthemarketwasusuallyhigheroverdifferenttimeperiodsafterthebigsellingdaywhentheArmsIndexwentabove2.65.Thequestiontheywantedtoanswerwas:“Doesitpaytogoalongandpanicwiththeherd?”Theiranswer:“Itdoesnot.”Remember,thatwhentheArmsIndexisatahigh,itmeansthatmostofthevolumeisgoingintothedecliningissues.Manytimesthisextremesellingcanbeaformofpanicandasellingclimax.Anotherveryinterestingnotethattheymadewasthataftera2.65reading,akeytradinglowcameashorttimelater.Thechartbelowshowsthe

ArmsIndexwhenvaluesaregreaterthan2.65.Eachdownspikeatthebottomofchart9-6identifiesadaywhentheArmsIndexisgreaterthan2.65.

Chart9-6

TimHayesatNedDavisResearchusesa40-dayaverageoftheArmsIndexfortheirintermediate-termwork.HesaysthattheArmsIndexisagoodmeasureofthequalityofvolumeinthemarket,moreonanintermediatetoshorttermbasis.Buysignalsoccurwhentheindicatorincreasesto1.12oratleastto.968andthenreverses.Sellindicationsarereadingsbelow.798oradecreasetoatleast.928andthenbackabovethelevel.Chart9-7isaplotofthe40-dayaverageoftheArmsIndex(TRIN).

Chart9-7

ArthurMerrillin1992,saidthatthesimpledailyclosingArmsIndexseemstobeusefulinforecastingthedirectionofthemarketofthefollowingdayonlyatveryhighreadingsabove2.3,orverylowreadingsbelow0.4.Thisoccursonlyrarely.ArthurwasusingthepricesoftheDowJonesIndustrialAverageforthisanalysisandonly435days(lessthan2years)ofmarketdata.

AuthorComments:TheArmsIndexandtheAdvanceDeclineLinearethetwomostoveranalyzedbreadthindicatorsIknowof.Thatiscertainlyameasureoftheirpopularity.TherearemanyderivationsoftheArmsIndex,somegood,somenotsogood.Thissectionhaspresentedmostofthem.OnethingthatstandsoutisthatthebullishnessoftheArmsIndexisrelatedtothenumberofdecliningissues.Thisisalittlehardtograspuntilyoustudytheformula.

IhavealwaysfoundtherawArmsIndexdifficulttousefortrading,otherthanaquickpictureofwherevolumeisflowing,eitherintoadvancingstocksordecliningstocks.Imuchprefertoinvertit,smoothit,andsetupzonesfor

bullishandbearishreadings.RichardArmstoldmeatatechnicalanalysisconferenceinDallas,Texas,intheearly1990sthathewishedhehadinverteditinthebeginningbecauseoftheinterpretationproblemsmostfolkshadwithusinganinvertedindicator.Invertingitdoesnotaffectitsinterpretationinanyway,itjustusesthemorepopular“upisbullishanddownisbearish”convention.Also,RichardArmsisofthebeliefthatvolumeisthemostimportantcomponentofthemarket.Tomakehispointduringhispresentation,Dickmadethecommentthatwhenhelefthisofficetogotolunch,hetoldhissecretarythathewouldbebackinabout35millionshares.Healsosaidina1991interviewforStocks&Commoditiesmagazine,thatifthemarketwereawristwatch,itwouldbedividedintoshares,nothours.

InreferencetoArms4-dayaverageoftheArmsIndexandthe15%bandsaroundthe13-dayaverageshowninchart9-3,itlookstomethattheconceptisquitegood,butevenbetterifyouwaituntilthe4-daysmoothedvaluereturnswithinthebandsbeforegeneratingasignal.Inotherwords,abuysignalisgivenafterthe4-dayaveragegoesabovetheupperbandandthendropsbelowit.Likewise,asellsignalisgivenwhenitcomesfrombelowtoabovethelowerband.Thisinterpretationwasdonebyusingacursorandvisuallylookingatthedatafrom1965toearly2005.

RobertNurock,thechiefelfontheWallStreetWeektelevisionshow,whocreatedtheWallStreetWeekIndex,usedtheArmsIndexasoneofthatindex’scomponents.Abullishsignalwasgivenwhenthe10-dayaverageoftheArmsIndexwasabove1.2andbearishwhenbelow0.8.

Formula:(AD)(UV/DV)

StockCharts.com’sSymbols:!BINYAI,!BINYAIO2155,!BINYAI10,!BINYAI265

References:

Arms,RichardW.Jr.TheArmsIndex(TRIN).DowJones-Irwin,1989.

Arms,RichardW.,“CrossYourArms.”Stocks&Commodities,Volume9,May1991,pp.177-179.

Achelis,StevenB.TechnicalAnalysisfromAtoZ.NewYork:McGraw-Hill,1995.

Alphier,JamesandKuhn,Bill,“AHelpingHandfromtheArmsIndex.”Stocks

&Commodities,Volume5,April1987,pp.142-143.

Aspray,Thomas,“NYSEtechnicalindicators:diagnosingmarketbottoms.”Stocks&Commodities,Volume6,June1987,pp.227-231.

Merrill,Arthur,“VolumeIndices.”Stocks&Commodities,Volume7,September1989,pp.301-303.

Hayes,Tim,“TimHayes:RunningwiththeTrend.”Stocks&Commodities,Volume9,August1991,pp.310-315.

Davis,Ned.BeingRightorMakingMoney.NedDavisResearch,1991.

Arms’OpenIndex

Author/Creator:SuggestedbyHarveyWilbur,recommendedbyJohnMcGinleyandPeterEliades.

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:ThisisasmoothedversionofRichardArms’ShortTermTradingIndexorArmsIndex,however,itsmoothstheindividualcomponentspriortodoingthemultipledivisions.Wilburuseda10periodmovingaverageforthesmoothingeachofthecomponents.

Interpretation:SteveAchelisstatesthatreadingsabove.9arebearishandbelow.9arebullish.Whileitseemstopicktopsandbottomsattimes,othertimesseemtonotdoso,asshowninchart9-8.

Chart9-8

AuthorComments:Personally,I’llstickwithDickArmsoriginalindex,butdisplayitupsidedownsoitismoreintuitiveformeandthengiveita10-daysmoothing.IusetheArmsIndexforashorttermpictureofthemarkets;toassistindeterminingwherethevolumeisgoing,eitherintoadvancesordeclines.IcanseethemeritsoftheArmsOpen(preferOpenArms–soundsmoreinviting),butalsoprefertojustuseasmoothedversionofTRIN(ArmsIndex).However,Wilburwasn’tfinishedwiththeArmsIndexandhismodificationstoit.

InNovember,1992,HarleyWilburpresented,inmyopinion,thebestmodificationtothecontinuouslymodifiedArmsIndex.Henormalizeditrelativetoitsownvolatility.Firstofall,hetooktheArmsOpenIndexusing10dayaverages,tooka10-dayaverageofthat,andthennormalizeditwithtypicaltwostandarddeviationBollingerbands.Thismadetheindicatoroscillateessentiallybetweenzeroand100,withzerobeingthelowerBollingerbandand

100representingtheupperBollingerband.HecalledthisindicatorTrin10.Chart9-9showsinthemiddleplottheArmsOpenindexwithBollingerbands.IfyouthenimaginedthatyoutooktheendsofthetwoBollingerbandsandpulledthemtaughtsotheywereparallelstraightlines,thelowerplotshowsthis.Thehorizontallinesatzeroand100areinfacttheBollingerbandsandtheopenarmsindexisdisplayedwithitssamerelativepositiontothebandsasitwasinthemiddleplot.

Chart9-9

WilburnextweightedtheTrin10withafiveperiodweightedmovingaverageasshowninchart9-10.Aweightedaverageisonethathasalinearweightingwiththemostrecenthavingthegreatestweightandtheoldesthavingtheleast.Wilbursuggestedthetradingstrategywastobuyonanuptickfrombelow20andsellonadowntickfromabove80.Wilburreadilyadmittedthatitdidnotalwayswork,butrateditgoodenoughtokeepinthetechnician’sarsenal.Icertainlyagree.

Chart9-10

Formula:TRIN=(AD)(UVDV),(TRIN–LowerBB)(UpperBB–LowerBB).

StockCharts.com’sSymbols:!BINYAOI10,!BINYTRIN10

References:

Achelis,StevenB.TechnicalAnalysisfromAtoZ.NewYork:McGraw-Hill,1995.

Wilbur,Harley,“ATwistontheArmsIndex.”StocksandCommodities,Volume10,November1992,pp.449-453.

Merrill,Arthur,“ClosingArms.”StocksandCommodities,Volume10,April1992,pp.148-150.

BretzTRIN-5

Show:BretzTRIN-5(inverted)

Author/Creator:W.G.Bretz

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:TheBretzTRIN-5IndicatorwasdevelopedbyW.G.Bretz,anditwasdubbedtheTRIN-5byJerryFavorswhopublishedanarticleonit(TechnicalAnalysisofStocks&CommoditiesMagazine;March1992).FavorsclaimedthatitisabettertoppickerthantheotherversionsoftheArmsIndex.Thecalculationissimplya5-daymovingsum(notamovingaverage)oftheArmsIndex.

Interpretation:Whentheindicatorreachesanextremelevelabove6.00,thenturnsdown,abuysignalisgenerated.Whentheindicatorreachesanextremelevelbelow4.00,thenturnsup,asellsignalisgenerated.Itappearstobeaseffectiveasorbetterthanthe10dayTRINatmarketbottomsanditisfarmoreeffectiveatmarkettopsandisshowninchart9-11.

Chart9-11

AuthorComments:CarlSwenlindoeswhatmostofusdowithArmsIndexrelatedindicatorsandderivations,heinvertsitsothatthemorenormalappearanceofoverboughtandoversoldarecorrectandmoreintuitive.Chart9-12showsitasinvertedwiththecalculationsothatoverboughtisupandoversoldisdown.Theinterpretationnowisthatwhenthisindicatorrisesfrombelow4andturnsup,abuysignalhasbeengenerated.Andwhenitgoesfromabove6andturnsdownasellsignalisgenerated.PersonallyIliketoseebuysignalswhenitgoesfrombelow4andthengoesabove6beforeitgeneratesabuysignal.Likewise,whenitdropsfromabove6andgoesbelow4,asellsignalisgiven.

Chart9-12

Formula:(AD)(UV/DV)summedoverthelast5days.

StockCharts.com’sSymbols:!BINYBTRIN5,!BINYBTRIN5I

References:

Bretz,W.G.JunctureRecognitionintheStockMarket.VantagePress,1972.

Favors,Jerry,“TheTrin-5.”StocksandCommodities,Volume10,March1992,pp.125-126.

CashFlowIndex

Alsoknownas:seeTheTechnicalIndex

Author/Creator:WilliamMason

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV),NewHighs(H),NewLows(L),TotalIssues(TI),Volume(V).

Description:TheCashFlowIndexiscreatedbytakingthenetdifferenceoftheadvancesanddeclines,upanddownvolume,andnewhighsandnewlows;expressingthemasapercentageoftheirrespectivebase,combiningthemtogetanewvalue;andmultiplyingitbythevolumefortheday,thenaccumulatingthedailyvalues.Masonsaidthatthereasonforusingpercentagesisthatnosingleparameterwilldominate.

Interpretation:Mostindicatorsofcashflowaremeasuringpriceandvolumeortwonon-neutralizingcomponentsofmarketstatistics.UsingittohelpconfirmnewhighsinthemarketwouldbeabouttheonlywayIcanthinkofthatthiswouldbeeffective.Chart9-13isthecashflowindexdevelopedbyMason.

Chart9-13

AuthorComments:IhaveonlyfoundafewsentencesonthisindicatorbyWilliamMason.ItisaderivationoftheTechnicalIndexhedevelopedwithadailytotalvolumecomponentaddedtoit.SinceoneofthecomponentsintheTechnicalIndexistheupvolumedownvolumedifferenceandtotalvolumeratio,addingthetotalvolumeasamultiplierseemstodampen,andalmosthinder,theusefulnessofthisindicator.Itrenderstheratioineffective,andmakesthevolumecontributiononlythatofthedifferencebetweentheupanddownvolume.Onemightimproveitbydetrendingitwithamovingaverageof50daysorso.

Formula:PreviousValue+Today’s(V*((A–D)TI)+((UV–DV)V)+((H–L)/TI))

StockCharts.com’sSymbol:!BINYCFI

References:

Mason,William,“MasterOscillator.”StocksandCommodities,Volume7,April1989,pp.109-111.

CompositeTapeIndex

Author/Creator:SteveAchelisofEquisInternational

Datacomponentsrequired:Advances(A),Declines(D),NewHighs(H),NewLows(L),UpVolume(UV),DownVolume(DV).

Description:TheCompositeTapeIndexshowsmarketstrengthanddirection.BecausetheCTIdisplaysmarketstrength(momentum),ittendstobeatrendfollowingindicator.Theindicatorcanbeusedtoanticipatemarketmoves,butitisbestnotto“fightthetape”(aphraseMartinZweigcoinedyearsago).OncetheCompositeTapeIndexformsatrend,ittendstostayinthattrendforsometime.Andoncethetrendisbroken,itisusuallybrokenforgoodandanewtrendisthenestablished.BecausetheCTIisacompositeofseveraldifferentmomentumindicators,itisnotassubjecttofalsereadingsandwhipsawsasoftenasasingleindicator.

Interpretation:ThebasicanalysisoftheCompositeTapeIndexrequiresdeterminingthecurrenttrendanddecidingwhenthetrendhaschanged.Onemethodofdeterminingthetrendistowaitfortheindicatortoentertheoverbought/oversoldzonesandthenrise/fallfromtheselevels.Buysignalsaregivenwhentheindicatorfallsbelow-15andthenrisesabove-15,oranytimetheindicatorrisesabove+15.Likewise,sellsignalsaregeneratedwhentheindicatorrisesabove+15andthenfallsbelow+15,oranytimetheindicatorfallsbelow-15.AnothersystemthatworkswellsistobuywhenCTIrisesabovezeroandsellwhenitfallsbelowzero.Chart9-14showsthemediumtermcompositetapeindex.

Chart9-14

Theshorttermcompositeindexusesfasterparametersandisshowninchart9-15.Ingeneralterms,theparametersfortheshorttermversionareabout20%lessthanthemediumtermtapeindex.Theoverboughtandoversoldlevelsthatseemtoworkwellare+10and-10.Theanalysisanduseoftheshorttermcompositeisthesameasthemediumtermcomposite.

Chart9-15

AuthorComments:ThesearegreatindicatorsandIknowtheycomefromStevenAchelis,thefounderofEquisInternational.Yearsago,StevehadasoftwareprogramcalledTheTechnicianwhichwasMS-DOSbasedandI’msurethepressurefromuserstocomeoutwithaMS-Windowsbasedversionwashigh.Therefore,ithasessentiallybeenincorporatedintothelatestversion(9.0)ofMetaStock.

Iprefertousethisindicatorforsignalsthatoccurwhenitcrossesaboveandbelowthezeroline.Theyseemtoworkbetterandavoidtheoften-timessubjectivenatureofoverboughtandoversold.

Ifthereisashortandmediumtermversion,whynotalongtermversion?Forthis,Ijustdoubledthevalueofthedefaultparametersofthemediumversiontogetthechartbelow.HereishowIwouldusethisversion:Itdoesagreatjobofidentifyingtopsandbottomsusing+30foroverboughtand-20foroversold.Italsoseemstobegoodusingthezero-linecrossover.Onecanbegintoleginon

theoversoldcrossingfrombelowtoabovethe-20line,thentakemorepositionsaftercrossingthezeroline.Sellingcanbedonethesameway.Partiallyexitpositionswhenitcomesfromabovetobelowthe+30line,thenexitallwhenitdropsbelowthezeroline.Chart9-16ismyversionofthelongtermcompositetapeindicator.

Chart9-16

StockCharts.com’sSymbols:!BINYCTIS,!BINYCTIM,!BINYCTIL

References:

MetaStockProfessional9.0,EquisInternational,SaltLakeCity,UT.

DysartPositiveNegativeVolume

Author/Creator:PaulDysart

Datacomponentsrequired:Advances(A),Declines(D)Volume(V).

Description:PaulDysartusedasimilarconcepttoGranville’sOnBalanceVolumewithhisPositiveandNegativeIssuesTradedIndexes.Thepositiveversionwasthesummationofadvancesminusdeclinesonlyondayswhenthetotalvolumeoftradingincreasesoverthatofthepreviousday.Thenegativeversionissimilarinthatitusestheadvancedeclinedifferencewhenthevolumedecreases.

Interpretation:ThiswouldbeusedsimilartousingJoeGranville’sOnBalanceVolume.Spottingwheretheydonotfollowthepricewillleadtomarketturns.Chart9-17showsbothversionswiththenegativeversionbeingthebolderofthetwo.Donotgetconfusedwiththischartasthetwoindicatorsaredisplayedusingtotallydifferentscalessoanycrossingofeachotherisnotviable.Thedarkerlineisthepositiveversion.

Chart9-17

AuthorComments:Thereisverylittlewrittenabouttheseindicators.Theyaretake-offsofDysart’soriginalNegativeVolumeIndex.

Formula:Iftheclosetodayisgreaterthanthecloseyesterday,useupvolume.Ifnot,usedownvolume.Thenaccumulatethenumbers.

StockCharts.com’sSymbols:!BINYDNI,!BINYDPI

References:

Merrill,Arthur,“NegativeVolumeDivergenceIndex.”Stocks&Commodities,Volume8,October1990,pp.396-397.

Peterson,Dennis,“MarketBreadth:Volume.”Stocks&Commodities,Volume19,February2001,pp.57-60.

EliadesNewTRIN

Author/Creator:PeterEliades

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:TheEliadesNewTRINcalculationisa10-daymovingaverageofdownvolume,dividedbya10-daymovingaverageofupvolume,furtherdividedbya10-daymovingaverageoftheArmsIndex(TRIN).

Interpretation:Whentheindicatorcrossesbelow.8,andthenmovesbackabove.8,asellsignalisgenerated.Chart9-18showsEliadesNewTRIN.

Chart9-18

AuthorComments:Onceagain,invertingthechartofthisindicatorwillmakeitmoreintuitive,butdoesnotaddanythingtotheinterpretation.However,myseventhgradealgebrasaysthatthisisessentiallyjusttheratioofdeclinesand

advances.Theactofsmoothingthecomponentskeepsthissomewhatdifferentthanthedeclineadvanceratiointhatthelevelsarealittledifferent;however,thelinesareclosetothesame.SincePeterEliadeshasmadesignificantcontributionstotechnicalanalysis,Isuspecthisinterpretationwouldbebetterthanmine.

Formula:(DVAV)((AD)(UV/DV))

StockCharts.com’sSymbol:!BINYENTRIN

References:

Swenlin,Carl,www.decisionpoint.com.

Eliades,Peter,www.stockmarketcycles.com.

HallerTheory

Author/Creator:GilbertHaller

Datacomponentsrequired:Advances(A),Declines(D),NewHighs(H),NewLows(L).

Description:TheHallerTheoryfordeterminingmarkettopsandbottomsismorethanjustabreadth-basedmethod.ItinvolvestheyieldontheDowJonesIndustrialAverageinadditiontoweeklyadvancedeclinelinedataandweeklynewhighandnewlowdata.Thereareessentiallytwotypesofbuysignals,onewhichisanopportunitytobuyduringanidentifiabletrendandtheotherisduringasellingclimax.Thesellsignalsarebasicallytheopposite.

Interpretation:

TrendBuySignal

1.Theadvancedeclinelinemustturnupby2400points.

2.Thenewhighnewlowdifferencemustequalanet+80newhighs.

3.TherecanbenoTrendBuyuntiltherehasbeenaTrendSellSignal.

TrendSellSignal

1.TheyieldontheDowJonesIndustrialAveragemustbelessthan5%.

2.Theadvancedeclinelinemustturndownby2400points.

3.Thenewhighnewlowdifferencemustequalanet-80newlows.

4.TherecanbenoTrendSellSignaluntiltherehasbeenaTrendBuySignal.

BottomBuySignals.

1.Buythestartofthefourthweekafterthenetnewlowsequals-750.

2.Ifthereisaweekinwhichtherearemorenewlowsthattheweekthatgavethefirstsignal,startthe4-weektimingover.

3.IfthereisnotBottomBuySignal,buyatthenextTrendBuySignal.

TopSellSignals

1.TheyieldontheDowJonesIndustrialAveragewaslessthan4%atonetimeduringthebullmove.

2.Thebullmovehadtolastforatleastayear.

3.Theadvancedeclinelinemusthavefailed,whichisamovethatdropsbelowapreviouslowwitheachlegbeingatleasttwoweeksinlength.

4.Theinitialpeakoftheadvancedeclinelineisthehighfortheline.

5.Theadvancedeclinelinemustriseforthreeweekstomakeathirdpeak.

6.Theadvancedeclinelinethenmustdropbyover300points.

7.Thenetnumberofnewhighsmustbelessthanthethatofthefinalpeakthanearlier.

8.Volumemustalsobeloweronthefinalpeakthanpreviouslybasedupona6weekmovingaverage.

AuthorComments:Haller’sself-publishedbookisaninterestingread.Theconcepthedevelopedisfairlysimpleinsofaratthedatarelationshipandeffective,butnotconduciveforachartwithanindicatorortradingsystem.Ispentquiteabitoftimeoncreatinganindicatorthatwouldreflectthissystem,eventothepointofpairingitdowntousingonlythebreadthdata.Iliketheideaofusingtrendsignalsalongwithclimacticbuyandsellsignals.Heclaimedthatfrom1942to1964therewerenobadsignals,however,notmentionofdrawdownorotherrisk-basedanalysiswasoffered.YoucanalsosensehisdeepunderstandingofthedifficultyoftimingmarkettopsbaseduponthecomplexmethodologygivenintheTopSellSignals.Finally,keepinmindthiswasalldoneover40yearsagowithcolumnarpadandnotevenacalculator,letaloneacomputer.Chart9-19showsportionsoftheHallerTheory.Iused200fortheTrendlimitsonthehighlowcomponentbecauseatthetimeofthisindicator’sdevelopment,thetotalofweeklynewhighsplusnewlowsplus1000ismorethandoublenow.Thedottedupwardspikesthatreach+3aretheBottomBuySignals.Thedotteddownwardspikesthatreach-1aretheTrendSellSignals.Thesolidlinethatreaches+1aretheTrendBuySignals.TheTopSellSignalscouldnotbereproducedbecauseofthesubjectivityofhisrules.

Chart9-19

StockCharts.com’sSymbols:!BINYHTBBDW,!BINYHTTBDW,!BINYHTTSDW

References:

Haller,Gilbert.TheHallerTheoryofStockMarketTrends.WestPalmBeach:GilbertHaller,1965.

HindenburgOmen

Alsoknownas:NewHighNewLowSellSignal

Author/Creator:JamesR.Miekka.

Datacomponentsrequired:NewHighs(H),NewLows(L),Advances(A),Declines(D),TotalIssues(TI),MarketIndex(MKT).

Description:ThisindicationofmarkettopswascreatedbyJamesR.Miekkaanddubbed“theHindenburgOmen”byKennedyGammageoftheRichlandReport.You’llrecognizeKennedyastheformerprovideroftheMcClellanOscillatorandSummationIndexnumbersonFNNandnow,CNBCtelevision.

TheremainingmaterialonthisindicatorwaswrittenbythelateJamesR.Miekka,creatoroftheHindenburgOmen:

TheHindenburgOmenisasellsignalthatoccurswhenNYSEnewhighsandnewlowseachexceed2.8%ofadvancesplusdeclinesonthesameday.Inaddition,theNYSEindexmustbeabovethevalueithad50tradingdays(tenweeks)ago.Oncethesignalhasoccurred,itisvalidfor30tradingdays.Anyadditionalsignalsgivenduringthe30-dayperiodshouldbeignored.Duringthe30days,thesignalisactivatedwhenevertheMcClellanOscillator(MCO)isnegative,butdeactivatedwhenevertheMCOispositive.ThesignalstartingpointwasoriginallycalculatedtobewhenNHandNLequaledorexceeded2.4%oftotalissuestraded,butwaslatersimplifiedto2.8%ofadvancesplusdeclines.ThissignalwasdevelopedasanimprovementupontheSplitMarketSellSignaldevelopedbyGeraldAppel.Appel’ssignalusedafixednumberofnewhighsandnewlows(45ofeach),whichwasnotindexedforincreasingnumbersofsharestrades,andhissignaldidnotrequirevalidationbytheMCObeingnegative.

Interpretation:Thissignalgenerallyoccursafterarisingmarketwhenthenumberofnewlowsisrisingrapidly,butwhennewhighsarestillquitenumerous.Thelargenumberofhighsandlowssuggeststhatthemarketisindecisiveandprobablyataturningpoint.Ofcourse,asimilarscenariocanoccurduringafallingmarketwhennewlowsarenumerousbutnewhighsbegintoriserapidly.Thelatterconditionwouldsuggestthatsuchmarketindecisioncouldbeabuysignalinafallingmarket.Thishasnotbeenstudied,atleastnotbyJamesMiekka,otherthantonotethatthesellsignalisnotreliablewhenNYSEisbelowitsten-weeks-agovalue.ToutilizetheHindenburgOmensignal,

Miekkasuggeststhefollowing:

1.GoshortthemarketwhenevertheMcClellanOscillatorisnegativeduringthe30tradingdaysafteravalidsignalhasbeengiven.

2.Exitthemarketfor30dayswheneverthesignalisgiven,oratleastbewaryofanynewstockorstockindexpurchaseswhilethesignalisvalidandespeciallyifitisactivatedbyanegativeMCO.

ByexitingthemarketwhenasignalwasgivenonSeptember23,1987,youwouldhaveavoidedthecrashof1987.

AuthorComments:JimMiekkahasprovidedasignificantindicatorofmarketdanger.Anindicatordevelopedfromalogicalpointofviewisusuallyonethatwillserveyouwell.Thisonedoesjustthat.Inchart9-20IhavetriedtorecreatethisindicatorascloselytoMiekka’sparametersasIcan.AnydifferencebetweenthechartsignalsandJim’sactualareafaultwithmyprogramming.

Chart9-20

Whileitisnotthepurposeofthisbooktodiscernperformanceofthesebreadthindicators,JimprovidedthisformeandIwanttodeviatefromthatpurposejustthisonce.ThefollowingtablegivesahistoryoftheHindenburgOmenfrom1993to2004,usingtheoldNYSEastheindex.ToconverttonewNYSE,multiplythepointsby10.78.

**ShortonlywhentheMcClellanOscillatorisnegativefor30daysaftersignalisgiven.

StockCharts.com’sSymbol:!BINYHOD

References:

Gammage,Kennedy,2004,TheRichlandReport,LaJolla,CA.

Miekka,JamesR.,TheSudburyBullandBearReport,St.Petersburg,FL.

MarketThrust

Author/Creator:TusharChande

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:TusharChandeoffersthisasawaytoovercomesomeoftheperceivedlimitationsintheArmsIndex.Theadvantagesofthisindicatorarethatitsubdividedtheproductofadvancesandupvolume,andthedeclinesanddownvolume.Thishelpsidentifyastrongupordownday.Italsoshowsthenetbalancebetweenbullishandbearishactivityusingrelativevolumeflows,anditpresentsconsistentinformation.

Interpretation:Thisindicator,asshowninchart9-21,isbasicallyusedtospotlargemovesinthemarket.Usingtheproductofadvancesandupvolumewillgeneratesignificantupmovesinthisindicatorifvolumeisflowingintotheadvancesandmanystocksareadvancing.Likewise,thedownmovesaresignaledbytheproductofdeclinesanddownvolume.

Chart9-21

ChandefurtherrefineshisconcepttocreateaThrustOscillator.ThisistheMarketThrustconceptputintoadimensionlessratioandshowninchart9-22.Hestatesthatthismaybeconsideredavolume-weightedadvancedeclineratiovariation.

Chart9-22

AuthorComments:InthesamearticlethatTusharChandeoutlineshisMarketThrustindicator,hestatesthatyoucancumulatethedailyvalues(liketheadvancedeclineline)toidentifyunderlyingtrends.Likemanyoftheindicatorscreatedbeforemarketvolumeincreased,thechangetodecimalization,andtheadditionofmanyinterestsensitivestockstotheNYexchange,thissummationindexdoesnotseemtoaddmuchtothepicture.Anyinterpretationmustbekeptwithinashortperiodofdatatoremovetheabovementionedaffects.InalaterarticleTusharChandeshowsmanychartstogiveweighttohisMarketThrustSummationindicatoroverthemorecommonAdvanceDeclineLine.Theargumentisconvincing,asIhavealwayslikedavolumecomponenttopricebasedindicators.ThatiswhatIdidwiththeMcClellanOscillatorandSummationIndex.Chart9-23showsthecumulativeMarketThrustindicator.

Chart9-23

Inhisbook,“TheNewTechnicalTrader,”ChandepointsoutthattheArmsIndexisboundedbetween0and1forupdays,butunboundedbeyond1ondowndays.This,hestates,iswhysmoothingtheArmsIndexmakesitdifficulttouse.Ifyouthinkaboutit,hehasagoodpoint.WeakmarketactioncanproduceanArmsIndexreadingof3,4,andhigher,and,infact,hasdonesomanytimes.However,thestrongestbreadthdaycannotevergetto0ontheArmsIndex.Inotherwords,thescalingisskewed.ThisisnotsowithhisThrustOscillator,whichhelpsidentifystrongupanddowndaysequally.

ChandeoffersacoupleoftradingstrategiesinhisbookwithStanlyKroll.Oneisthetakea5-daysimplemovingaverageofhisThrustOscillatorandoverlaya5-dayexponentialaverageonitfortradingsignals.ThisissomewhatlikeStochastics%Kandits3-daysmoothingfor%D.Alongertermstrategywouldbetoplota50-daysimplemovingaverageoftheThrustOscillatorandusingitscrossingofthatsmoothedvalueforsignals.

StuartMeibuhr,suggestedinalaterarticletouseChande’sThrustOscillatorinasimilarmannerasRichardArmsusedhisOpenArmsindicator.Additionally,MeibuhrsaidthatChande’sThrustOscillator,whenitwentbelow-0.30,andsmoothedby21dayswasverygoodatpointingoutmarketbottoms.Thiswaslookingatthe21dayand55-dayaverageoftheThrustOscillator.Chart9-24isaplotwhichshowsthetwoaveragesandthedifferencebetweenthem.Itooktheconceptasimplestepfurtherbysmoothingthedifferencewitha5-dayaverage.Onecaneasilyjustifytradingusingthecrossingofthezeroline.

Chart9-24

Formula:((AUV)–(DDV))/((AUV)+(DDV))

StockCharts.com’sSymbols:!BINYMT,!BINYMTO,!BINYMTO2155,!BINYMTS

References:

Chande,TusharS.andKroll,Stanley.TheNewTechnicalTrader.JohnWiley&

Sons,1994.

Chande,TusharS.,“MarketThrust,”Stocks&Commodities,Volume10,August1992,pp.347-350.

Chande,TusharS.,“TheCumulativeMarketThrustLine,”Stocks&Commodities,Volume11,December1993,pp.506-511.

Meibuhr,Stuart,“OexandtheThrustOscillator.”Stocks&Commodities,March1993,pp.127-132.

Rusin,Jack,“Anissue/volume-weightedlong-termArmsindex,”Stocks&Commodities,Volume9,October1991,pp.419-421.

Rusin,Jack,”TheInternalDynamicsofTrin,”Stocks&Commodities,Volume10,January1992,pp.22-25.

McClellanOscillatorwithVolume

Author/Creator:GregMorris

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:ThisistheMcClellanOscillatorwithavolumecomponentcalculatedintotheformula.Insteadofusingjustadvances(A),Ihaveusedadvancestimesupvolume(AUV).Similarly,insteadofusingjustdeclines(D),Ihaveused(declinestimesdownvolume(DDV).TheformulaisidenticaltotheoriginalMcClellanOscillatorotherthanthat.

Interpretation:TheinterpretationisexactlythesameasthatusedfortheMcClellanOscillator.ThisissomewhatofacombinationoftheMcClellanOscillatorandtheMcClellanOscillatorthatusingvolume–thisoneusesboththeadvancedeclinedataenhancedwithvolumeandisshowninchart9-25.

Chart9-25

AuthorComments:Ihavealwayspreferredtheinfluenceofvolumeonmostprice-basedindicators.Thisseemstogeneratesomegreatsignalsforpickingmarketbottoms,similartothevolumeonlyoscillatorthattheMcClellansuse.However,thisoneseemstoidentifymarkettopsquitewellusingtheextremeoscillatorreadings.Wheneverthisindicatorpeaksandreverses,atop,evenifjustatradingdecline,isoccurring.Iwouldimaginethatsmoothingthisoscillatortodampenitandusinganexponentialsmoothingoverlaytogivesignalswouldworkwell.Chart9-26smoothsthevolume-basedoscillatorbya10periodexponentialaverageandalsobya3periodexponentialaverage.Youcanseethattheuseofthezero-linecrossingfrombelowtoaboveisgoodforbuysignalsandthecrossingofthe10periodsmooth(bolderline)belowthe3periodsmoothisgoodforsellsignals.

Chart9-26

Formula:PreviousValue+((Today’s19expaverageof(A*UV–D*DV)–(Today’s39expaverageof(A*UV–D*DV))

StockCharts.com’sSymbol:!BINYMCOM

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

McClellanSummationIndexwithVolume

Author/Creator:GregMorris

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV).

Description:ThisistheMcClellanSummationIndexwithavolumecomponentaddedtothecalculation.Insteadofusingjustadvances(A),Ihaveusedadvancestimesupvolume(A*UV).TheformulaisidenticaltotheoriginalMcClellanSummationIndexotherthantheaddedvolumecomponent.

Interpretation:Thissummationindexshouldbeinterpretedjustthesameastheothertwoversions,includingtheoriginal,andisshowninchart9-27.

Chart9-27

AuthorComments:Ihavealwayspreferredtheinfluenceofvolumeonprice-basedindicators.LiketheoriginalMcClellanSummationIndex,thedirection

andthelevelofthisindicatorareimportant.

Formula:ThisistheaccumulationoftheMcClellanOscillatorthatusesbothadvancesanddeclines,andupvolumeanddownvolume.

StockCharts.com’sSymbol:!BINYMCSM

References:

McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976.ThisbookwasoriginallypublishedbyTradeLevelsin1970.

McClellanFamilyInterview,“It’sAllIntheFamily:Sherman,Marian,andTomMcClellan.”StocksandCommodities,Volume12,June1994,pp.264-273.

MeyersSystems

Author/Creator:DennisMeyers

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV)NewHighs(H),NewLows(L).

Description:Thesearerelativestrengthsystemsbasedupnewhighs,newlows,amarketindex,andcombinationsofupvolumeanddownvolume,oradvancesanddeclines.

Interpretation:Meyers,aPh.DinappliedmathematicsinengineeringwrotefourarticlesinStocks&Commoditiesmagazinedescribingmarketsystemsusingvariouscombinationsofbreadthdata.ThemarketindexusedwastheDowJonesIndustrialAverage,howeverallhistestingwasdoneontheStandardandPoors500Index.

TheAdvance-Decline,New-High,New-LowMarketSystem

Thusoneusedweeklydataandlookedattheadvancedeclinelinerelativetothemarketalongwiththerelativestrengthofthenewhighsandnewlows.Withthesethreeindicatorsheidentifiedthresholdsforbuyingandselling.

A/DVolume,New-High,New-LowSystem

Withthisone,Meyersmovedtousingdailybreadthdatainsteadofweekly.Thisissimilartothefirstone,butinsteadofusingtheadvancesanddeclines,heusedupvolumeanddownvolume.ThevolumewascalculatedinaratiosimilartowhattheMcClellan’sandtheCarlSwenlinuse,(UV–DV)/(UV+DV).Likethefirstsystemhecalculatedtherelativestrengthofthevolumetothemarketinadditiontousingthesamenewhighandnewlowindicators.

ADailyA-DNew-High,NewLowMarketSystem

Almostayearafterpublishinghisfirstsystem,thisoneusesthesamebreadthcomponents,butfordailydata.Meyersalsosmoothedsomeoftherawdatainthissystem.

TheTurboA/D,NH,NLMarketSystem

Meyerscameoutwiththissystemafterdiscoveringaproblemhedenotedasalockoutcondition.Thisiscommonininternallynormalizedequationsasstrongmoveswilllockanormalizedindicatoratitsextremeswithverylittle

fluctuation.

AuthorComments:Everyonewhohasaninterestindesigningbreadth-basedsystemsneedstoreadthefourarticlesbyDennisMeyers.Hedidnotuncoveranythingearthshattering,buthisapproachtothefullunderstandingofthemarketsandthesecomponentsisgood.Meyersaddressesthedownfallsofblindoptimizationwhichwouldserveasagoodprimerforanyoneundertakingthetaskofcreatingasystem.Thesystemsdidnotdowellafterthemarkettopin2000,whichisnotsurprisingsincethedatausedtotestthefourtradingsystemsdidnotcontainasignificantbearmarket.MythankstoDennisforsharingthedetailsonthesesystemswithme.

References:

Meyers,Dennis,“TheAdvanceDecline,NewHigh,NewLowMarketSystem.”Stocks&Commodities,Volume14,February1996,pp.69-75.

Meyers,Dennis,“A/DVolume,NewHigh,NewLowSystem.”Stocks&Commodities,Volume14,July1996,pp.302-310.

Meyers,Dennis,“ADailyA-DNewHighNewLowMarketSystem.”Stocks&Commodities,Volume15,January1997,pp.11-19.

Meyers,Dennis,“TheTurboA/D,NH,NLMarketSystem.”Stocks&Commodities,Volume15,August1997,pp.337-346.

MovingBalanceIndicator

Creator:HumphreyE.D.Lloyd

Datarequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV)

Description:Dr.HumphreyLloyddevelopedtheMovingBalanceIndicator(MBI)inthemid-1970s.Hewantedtofindanindicatorthatwouldidentifyextremesinoverboughtandoversoldareas.Hecameupwithanindicatorthatcontainedthreedistinctcomponents.Thethreecomponentswere:TheA-Dcomponent,TheUpVolumecomponent,andtheTrader’sIndex(TRIN)component.

TheA-Dcomponent:Thisisthe10-daysimplemovingaverageoftheadvancingissuesdividedbythe10-daysimplemovingaverageofthedecliningissues.Thedifferencewasthenmultipliedby10.

TheUpVolumecomponent:Thisisthe10-daysimplemovingaverageofUpVolume.Thiscomponentwasusedtohelpidentifyreallystrongupmoves.Astimeprogressedandmarketvolumeincreased,hechangedthistomoderateitsaffectontheMBI.ThischangewastomakeUpVolumeapercentageofactivevolume(UpVolumeplusDownVolume),anddivideitby3.

TheTraders’Indexcomponent:Thisistheadvancesdividedbythedeclines,thendividedbytheupvolumedividedbythedownvolume(seeformulaforbetterunderstanding).ThisisalsoknownastheArmsIndex.SinceTRINisaninverseindicator,Dr.Lloyduseda“lookup”tabletoassignvaluesforvariouslevelsofTRINtoreverseitsvalueandgiveitabettercomponentweightequalinmagnitudetotheothertwocomponents.

TheMovingBalanceIndicatoristhencompletedbyaddingthethreecomponentstogetheranddividingby1.5.Thiswasdonetogiveitvaluesinthe20to100rangesoitcouldbeusedwithotherpopularindicatorssuchasWellesWilder’sRelativeStrengthIndex(RSI).

Interpretation:Dr.LloydlaidoutseveralmethodsofdeterminingbuyandsellsignalsusingactualMBIvalues.Volumeonthevariousexchangeshasincreasedsomuchsincehedevelopedthisindicatorthatthoseactualnumbersarenolongervalid.However,theconceptheusedwasgoodandisasfollows:

BuySignals

1.TheMBIhastopenetrateaparticularlevel.

2.Avalidbreakofatrendlinewhichconsistsofatleast3peaks.

3.ApositivedivergencebetweentheMBIandthemarket.

Hefurtherstatedthatitwasraretofindallthreesignalsatonce,butifyoudid,itwasprobablyaverygoodtrade.Agoodtradewasalsoexpectedwithanytwosignals.

SellSignals:

Thiswasmuchmoredifficulttodefine.HeusedanumberofdifferentmethodsbutfinallyresortedtousingMBIprimarilyforentry(buy)signals,andusingMBIincombinationwithotherindicatorsforsellsignals.Chart9-28showstheMovingBalanceIndicatorusingDr.Lloyd’ssignals.

Chart9-28

JosephT.Stewart,inhisbook,“DynamicStockOptionTrading,”usedMBI,butfurthersmootheditusingasimple5daymovingaverageofMBI.Youcanseeinchart9-29thatifyoualsoincludealongermovingaverageyoucangeneratesomegoodbuysignals.Inchart9-29a17daymovingaveragewasused.Noticethatitisnotagoodsystemfortrendingmarkets,butonlygoodforoscillatingmarkets.

Chart9-29

AuthorComments:JosephStewartnotedthattheMBIalsohasacyclicinterpretationtoit,soyoushouldgetinsyncwiththatcycle.Hestatesthereareoften10-20daysinwhichtheMBIwilldecline.Watchtoseeifithasitgottentoalevelinwhichithasrisinginthepast.

WhenIfirstreadaboutDr.Lloyd’snewindicatorintheveryearly1980s,IprogrammeditintomyAppleIIcomputerusingN-SquaredComputing’sMarket

Analyzersoftware.IdealtwiththeTRINlookuptableissuebyinvertingTRINandincludingamultiplierof10.ThisseemedtogeneratesimilarresultsastheoriginalMBI.LikeDr.Lloyd,IfoundthatusingMBIforentrysignalswasbetter.Ofcoursethisgoeswithmostindicatorsbecauseofthenatureofmarketbottomsbeingquickanddecisiveandmarkettopsbeinglongdrawnoutdistributionsthataremuchmoredifficulttodefine.Iusedtouseavalueof57fordeterminingabuysignalonMBI.ThiswaswhenMBIcrossedfrombelowtoabove57.However,inmorerecenttimesbecauseofchangingmarketconditions,abuysignalusinganMBIvalueof40seemstoworkwell.Inchart9-30,insteadofshowingwhereMBIwasbelow40,IdrewverticallinesatgoodmarketbottomssoyoucouldseethatMBIwascoincidentorleadingasanindicatorofmarketbottoms.Humphreyhasbeenagoodfriendandconfidantformanyyears.

Chart9-30

JosephStewartpointsoutaphenomenonduringbullishmovesthatoneneedsto

beawareof.Thatistheactofthemovingbalanceindextoslipintoanoverboughtsituationduringstrongupwardmovesaccompaniedbyheavyvolume.Hiswarningistonotbefooledbytheactionoftheindicatoranduseothertoolstohelpidentifythetop.ThisissoundadvicefromStewart,butitappliestoanyoscillatorduringthetypeofupwardthrustheistalkingabout.

Formula:((((10dayMAA)/(10dayMAD))*10)+((10dayMA(((UV)(UV+DV)))3)+(1/((AD)(UV/DV))*10))/1.5

StockCharts.com’sSymbol:!BINYMBI

References:

Lloyd,HumphreyE.D.TheMovingBalanceSystem,ANewTechniqueforStockandOptionTrading.Brightwaters,N.Y.,WindsorBooks,1976

Lloyd,HumphreyE.D.,TheRSLMarketTimingSystem.Brightwaters,N.Y.:WindsorBooks,1991.

Stewart,JosephT.DynamicStockOptionsTrading.NewYork:JohnWileyandSons,1981.

TechnicalIndex

Author/Creator:WilliamMason

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV),NewHighs(H),NewLows(L),TotalIssues(TI),Volume(V).

Description:TheTechnicalIndexiscreatedbytakingthenetdifferenceoftheadvancesanddeclines,upanddownvolume,andnewhighsandnewlows;expressingthemasapercentageoftheirrespectivebase,combiningthemtogetanewvalue;andaccumulatingthisvaluesimilartotheadvancedeclineline.Masonsaidthatthereasonforusingpercentagesisthatnosingleparameterwilldominate.

Interpretation:Likemostaccumulatedbreadthindicatorsthatlookatdifferences,thedisparitybetweenthemandtheirbaseindexiswhatislookedfor.Thediversionswillusuallyhappennearmarkettopsandbottomsasshowninchart9-31.

Chart9-31

AuthorComments:Ireallyliketheconceptofcompositeindicators,andasyoumightexpect,especiallylikeitwhenthecomponentsarethoseofbreadth.Thisindicatorcouldbeviewedastheall-encompassingbreathline.Likemostbreadthindicators,lookfordivergencewiththemarket.OnecanalsousearateofchangeoftheTechnicalIndex.Chart9-32isa21-dayrateofchangeofWilliamMason’sTechnicalIndex.Abovethezerolineisgenerallygoodforthemarket.

Chart9-32

Formula:PreviousValue+Today’s(((A–D)TI)+((UV–DV)V)+((H–L)/TI))

StockCharts.com’sSymbol:!BINYTI,!BINYTIROC

References:

Mason,William,“TechnicalIndexMeasuresMarketBreadth.”Stocks&Commodities,Volume7,January,1989,pp.9-12.

TitanicSyndrome

Author/Creator:BillOmaha,withmodificationsbyDennisMyers

Datacomponentsrequired:Advances(A),Declines(D),UpVolume(UV),DownVolume(DV),NewHighs(H),NewLows(L).

Description:BillOmahafirstwroteabouthisideainStocks&Commodities,November,1988.Hecoinedthenameafterlookingataseriesofmarkettopsinthemid-1960sandstatingthat,liketheTitanic,itwasfullspeedaheadpresumablyunprotectedagainstdisaster.

Interpretation:WhentheDowJonesIndustrialAveragehitsanewhighfortheyear,andinthetimeframeofsevendaysbeforeorafterthatdate,thenumberofnewlowsontheNewYorkStockExchangeexceedsthenewhighs.ThisexcessofnewlowsistheicebergthatOmaharefersto.

BillOmahaalsoaddsthatinadditiontothenewhigh,onecouldalsousethesignalwhenevertheDowJonesIndustrialAverageralliesover400points.Atthetimeofhiswriting,theDowIndustrialswereat2150,soa400-pointrallywasabout18.5%.Incidentally,theTitanicSyndromeappearedonAugust25,1987;theDowIndustrialshitanall-timehighat2746.45,andsixdayslaterthenewlowsoutnumberedthenewhighsonSeptember2,1987.OnOctober21,1987(lessthan3monthslater),itwasat1951.76,atdropofalmost29%.Chart9-3showstheTitanicSyndromeinitsoriginalform.

Chart9-33

In1991,BillOmahaprovidedanupgradedversionofhisTitanicSyndromeintheEquisMonitor,apublicationbyEquisInternational,thecreatorsofMetaStock..Hereheincludedmanyoftheconfirmationindicationsthatheonlymentionedthreeyearsbefore.Thistimeheofferedbuyandsellcriteria.

SellCriteria

1.TheDJIAmakesanew52-weekhigh.

and

2.Sevendays,eitherbeforeorafterthatnewhigh,theNYSEnewlowsaregreaterthanthenewhighs.

and

3a.AfterthenewhighintheDJIA,thedecliningissuesaregreaterthan1000fortwoconsecutivedaysandoneofthosedaysshowsanadvance/declineratiolessthan0.25.

or

3b.AfterthenewhighintheDJIA,fouroutofsevendayshavethedeclinesgreaterthan1000.

BuyCriteria:

1.A10%dropintheDJIAfromthenewhigh.

and

2.Afterthe10%drop,theadvancesaregreaterthan1000fortwoconsecutivedaysandoneofthosedayshastheadvance/declineratiogreaterthan4.0.

and

3.Afterthe10%drop,theadvance/declineratioisgreaterthan9.0(a)orlessthan0.11(b).

or

4.Afterthe10%drop,fouroutofsevendayshaveadvancesgreaterthan1000.

AsellsignalreversestoabuysignaliftheyearlynewhighintheDJIA(thenewhighthatgeneratedthesellsignal),ispenetratedontheupsideby2%.DennisMeyers,afrequentcontributortoStocks&Commoditiesmagazine,furtherrefinedOmaha’sTitanicSyndromein1995byaddedadditionalcomponents.Meyersremovedthebuycriteriathataftera10%dropintheDJIA,theadvance/declineratioislessthan0.11(BuyCriteria3(b)).Meyersalsorealizedthattheadvanceanddeclineissueusing1000asacriterionhadtobeincreased.Meyersappliedwhatmosthavehadtodolately,andthatistousearatioofadvancesanddeclines–adimensionlessvariable.HeappliedthislogicthroughouttheTitanicSyndrome.Finally,headdedtheonebreadthcomponentthatwasalwaysmissing,volume.Heusedanupvolumedownvolumeratioof9to1,justlikeMartinZweigusedinhisbook,WinningonWallStreet.

AuthorComments:Thisisgoodstuff,someonehasanoriginalthoughtonanindicatorandthenmodifiesitpublicly,onlytobemodifiedfurtherbysomeoneelselateron.Thisishowgoodindicatorsarecreated.Ialsolikeindicatorsthatusemostofthemajorcomponentsofbreadth.Thisonedoes.However,creatingformulaetorepresentthefullimpactoftheindicatorwasnexttoimpossiblesinceitwasbeyondtheformulalanguageIwasusing.ThechartsshowingtheTitanicSyndromeshouldbeviewedasanattempttoreflecttheconcept.

StockCharts.com’sSymbol:!BINYTS1988D

References:

Omaha,Bill,“PatternsthatDetectStockMarketReversals,”Stocks&Commodities,Volume6,November1988,ppp.416-421.

Omaha,Bill,“HowtoAvoidSinkingwiththeTitanic,”EquisMonitor,June/July1991.

Meyers,Dennis,“MakingtheTitanicFly.”Stocks&Commodities,Volume13,May1995,189-195.

Zweig,MartinE.WinningonWallStreet.NewYork:WarnerBooks,1986.

TrendExhaustionIndex

Author/Creator:CliffordL.Creel

Datacomponentsrequired:Advances(A),NewHighs(H).

Description:Thisisa10-dayexponentialaverageoftheNewHighsdividedbytheAdvances.

Interpretation:Creelstatesthatduringabullmarketmanystocksaremakingnewhighsandthusalargeproportionofadvancingstockseachdayarealsomakingnewhighs.ThisresultsinahighvalueforTEI.Asthemarkettops,thereisgenerallyashifttomoreconservativebluechipstocks.Whilethetopplaysout,withoccasionalrallies,theresultswillgenerateadvances,butnotnewhighs.ThiswillcausetheTEItodecline.TheTrendExhaustionIndexisshowninchart9-34.

Chart9-34

AuthorComments:Usingnewhighsandadvancesisanunusualtwisttousingbreathasmostbreadthindicatorsstickwithlikepairs,suchasadvancesanddeclines,newhighsandnewlows,etc.Chart9-35isaplotofnewlowsanddeclinesusingasimilarformulaasthetrendexhaustionindex.Agoodnamemightbetrendexplosionindex.Itseems,visually,thatwheneverthisindicatorrisesabove0.15amarketbottomhasbeenputintoplace.Ifanything,theTrendExhaustionIndexandTrendExplosionIndexwillassistyouinwarningofachangeinmarketdirection.

Chart9-35

Formula:(H/A)

References:

Creel,CliffordL.,“TrendExhaustionIndex.”Stocks&Commodities,Volume9,January,1991,pp.9-11.

CH10-TheMcClellanIndicatorsThischapterconsistsofcontributionsfromShermanMcClellan,TomMcClellan,andJamesMiekka.Itistheauthor’sopinionthattheMcClellanindicators,andinparticular,theMcClellanSummationIndex,isthesinglebestbreadthindicatoravailable.Ifyouhadtopickjustone,thiswouldbeit.Thischapterelaboratesonitscreation,itsconcept,itsmodifications,anditsusefulness.AnimportantconceptinusingandunderstandingtheMcClellanSummationIndexisalsoinchapter12,Conclusions.Also,don’tforgetthetraditionalcoverageoftheMcClellanOscillatorandSummationIndexinchapters4,8,and9.

TomandShermanMcClellanusealotofdifferentbreadthindicatorsintheiranalysis,includingthosediscussedhere,plusvariationsbasedonthem.TomMcClellansharesafewofthemwithus:

OneinterestingpermutationofusingtheA-DandVolumenumbersistodrawcomparisonsabouttheirstrength.Thisisnoteasytodo,becausetheyareindifferentunits,butwhenweemploytheSummationIndexcalculationstothisdataitmakessuchcomparisonspossible.

Weuse“ratio-adjusted”valuesforboththedailyA-DandUV-DVbreadth:

Thereasonformultiplyingtheseratiosby1000istoputtheresultbackupintotherealmofrealnumbers.Dealingwithtinydecimalnumberscanbedifficultmentally,andalsomakesforfunnyscalingonachart.

WethencalculateaRatio-AdjustedMcClellanOscillator(RAMO)foreach,andfromthoseOscillatorvalueswecancalculateRatio-AdjustedSummationIndices(RASIs)foreach.IfthevolumenumbersarepersistentlystrongerthantheA-Dnumbers,thentheVolumeRASIwillrisefasterthantheA-DRASI.

IfwecalculatethedifferencebetweentheVolumeRASIandtheA-DRASI,wecangetasortofarelativestrengthlineforthevolumeversustheA-Dnumbers,asshowninchart10-1.

Chart10-1

Whenthisindicatorismovingupward,itindicatesthattheVolumebreadthnumbersareactingstrongerthantheA-Dbreadthnumbers,andthoseconditionsareusuallyassociatedwithrisingprices.Itcanalsoshowextremeconditionswhenitmovesoutsideofthe+/-500area.Noticethatduring2000,theNYSECompwasmakinghigherhighswhilethisindicatorwasmakingaseriesoflowerhighs,indicatingthatthevolumenumberswerenolongershowingasmuchstrengthastheyhadbeen,andforeshadowingtheweaknessinthegeneralmarketthatwastoappearlateron.

TheRASIvaluesforA-DandUV-DVhavevalueontheirown,intermsofbeingabletotelluswhenanupmovehasthestrengthtocontinueintoalongertermuptrend,orwhenitisinsteadafailingeffort.Chart10-2showstheNYSE’sRASIforA-Ddata.

Chart10-2

NoticethatwhentheRASIgoesabove+500,itsaysthatthereismoreupwardmovementyettocome.Thehigheritgoesabove+500,thestrongerthatmessage.Thetermweuseforthisis“escapevelocity”,atitleborrowedfromthefieldofrocketrywhereitisusedtodescribearockethavingenoughspeedbuiltuptobeabletoescapeaplanet’sgravitationalfield.

Gettingabove+500doesnotmeanthatthemarketcannotundergoanormalperiodiccorrection,andeventaketheRASIbackdowntoanoversoldreading.Butgoingabove+500doessaythatweshouldexpectahigherpricehighonthesubsequentmove.Whenanupmovefailstoexceed+500,thatsaysthereareproblemswiththemarketbeingabletofindsufficientliquiditytocontinue.NoticeinChart10-2thatthefinalhighsforimportantuptrendstendtoendwithaRASIpeakbelow+500(the2010peakwasanotableexception).

ThisideaoftheRASIshowingstrengthforacontinuationoftheupmoveissimilartotheprincipleoftheMcClellanA-DOscillatorgoingupabovethe+150level,asdiscussedinChapter4underMcClellanOscillator.

TheRASI+500principlealsoworksontheVolumeRASI.

Chart10-3

MostoftheworkwedocontinuestobeontheNYSEA-DandUV-DVdata.Wehavelookedatsomeotherpermutations,andsomeofthemhavevalue.Backin1968,whenShermanandMarianMcClellanfirststarteddoingtheworkthatledtotheMcClellanOscillatorandSummationIndex,therewereonlytwoexchanges:theNYSEandtheAmericanStockExchange(AMEX).Forawhile,wekeptbreadthdataontheAMEX,butitsroleasaratherdistinctexchangeforcertainunusualtypesoflistingshasmadethatendeavorlessuseful.TheAMEXwaseventuallyboughtbytheIntercontinentalExchange(ICE)thesameparentcompanyoftheNYSE,andtheAMEXisnowknownasNYSEMKT.

TheNasdaqmarketwascreatedin1971asthe“NationalAssociationofSecuritiesDealersAutomatedQuotation(NASDAQ)system,andlaterturnedthatacronymintoitsname.Breadthdatadidnotbecomeavailableuntil1972.BecausethelistingstandardsontheNasdaqhavegenerallybeensofterthanforcompanieswantingtolistontheNYSE,theNasdaqA-Ddatahaveastrongdownwardbias.Asatriviaquestion,weliketoaskothertechnicalanalysts,“WhenwasthelasttimethattheNasdaqA-DLinemadeanewall-timehigh?”Thisisatrickquestion,becauseithasnevermadeanewall-timehigh.Itstartedgoingdownrightfromthebeginningofthedatain1972,andhasnevermadeitbackupthathigh.

Chart10-4

SoifyoueverseeachartshowingasupposeddivergencebetweenahigherNasdaqComppricehighbutalowerNasdaqA-DLinehigh,youshouldunderstandthatitisafairlycommonoccurrence,anditdoesnotcarrythesamebearishmeaningthatsuchadivergencehasfortheNYSE’sA-DLine.

KnowingthattheoverallNasdaqA-DLinehadabearishbias,wewonderedaboutthebehavioroftheleadingstocksinthatmarket,whichareorganizedintotheNasdaq100Index(NDX).Sobackin1999,weundertooktobuildourowndatabaseonthestockswhichcomprisethatindex,inordertoseewhattheA-Dandotherdatalookedlike.Thiswasbeforealotofdataprovidersstartedtobuildtheirownversionsofthesesubsetbreadthdata.

Onedifficultywasthataccuratedataonindexcomponentchangeswashardtocomeby.TheNasdaqpublishessomerecordsonthat,butsadlydidnotgobackasfaraswewouldhaveliked.Wecouldonlyconstructwhatweconsideredtobeafullandaccuratelistingofcomponentchangesandprice&volumedatabackto1993,andwehaveapproximatedvaluesforyearspriortothen.HereinChart10-5iswhattheNasdaq100A-DLinelookslike:

Chart10-5

YoucanseethatitdoesnothavethesamedegreeofabearishbiasastheoverallNasdaqA-DLine.Therearesomenotabledivergences,suchastheweaknessgoingintothe2000top,andalsothroughoutthe2003-07bullmarket.

Intheprocessofgatheringthatdata,wealsotabulateddailyvolumeforthecomponentstocks,whichgaveustheabilitytocreateourownUp-DownVolumeLine,showninChart10-6.

Chart10-6

Thisisacaseofthebreadthdatalookingtoomuchlikethepricedata,andtherebytakingawaymostofthevalueoftheexercise.Thewholepointoflookingatbreadthdataistoseethemarketinadifferentwayfromwhatthepriceindicesareshowing.SocreatinganUV-DVLinethatlooksalmostidenticaltotheNasdaq100Indexdoesnotgiveusmuchopportunitytoseeadifferentmessage.

ButthatdoesnotmeantheNDXUV-DVdataarewithoutvalue.SincewehavetheoverallNasdaqmarketUV-DVdatafromtheWallStreetJournal,andsincewecalculatethedataforthestocksintheNasdaq100Index,ifwefindthedifferencebetweenthemthenwehaveaviewonwhat’shappeningamongtherestoftheNasdaqstockswhichdidnotmakethevarsityteam.

AllwehadtodowassubtracttheNDXvolumestatisticsfromthecompositeNasdaqUpandDownVolumenumbers.Itturnsoutthatthese“ex-NDX”volumenumbersarealotlessnoisy,andtheyofferusgoodinsightsaboutthehealthofthesmallcapmarket.

Chart10-7showsthisex-NDXNasdaqVolumeLinecomparedtotheRussell2000Index,whichisasmall-capstockbenchmark.Thetwocorrelatequitenicelywitheachother,atleastmostofthetime.Theinsightscomefromtherareinstanceswhentheydivergefromoneanother.Intheseinstances,itisusually

thisex-NDXNasdaqVolumeLinewhichtellsthetruestoryaboutthestrengthofthemarket.

Chart10-7

IncaseswhentheRussell2000IndexmakeshigherhighsandthisVolumeLinefailstoconfirm,theresultisabigdeclineintheRussell2000.ProlongedstrengthinthisVolumeLine,likewesawinearly2003,tendstoforetellcontinuingstrengthforthesmallcapmarket.

Welaterhadtomakeoneadditionaladjustmenttothesedata,becausetheNasdaqmoveditsbigETF,QQQ,backfromtradingontheAMEXtoinsteadtradeontheNasdaq.ItdidnotseemrighttoustohavethevolumedatafortheQQQcontributingtoUporDownVolume,soweexcisedthatdataaswell.HereinChart10-8isamorecurrentview:

Chart10-8

WhentheRussell2000makesapenetrationofits5%TrendwhichisunconfirmedbythisUp-DownVolumeLine,itcanbeanimportantmessageoffailureforthatpenetration.

Lookingatthe“CommonOnly”A-DData

IthaslongbeenacriticismoftheA-DdataontheNYSEthatthelistof“stocks”iscontaminatedbysocalled“interestsensitive”issueswhicharetradedlikestocksontheNYSE.Theseincludepreferredstocks,rights,warrants,bond-relatedclosedendfunds(CEFs),andotherspecialtyitemswhichonewouldnotcategorizeascommonstocks.

Interestingly,thissamecriticismhasbeenaroundfor50+years.Backinthe1960s,whenanalystswerefirststartingtousetheA-Ddatainearnest,criticsclaimedthatitwascontaminatedbyinterestsensitivestocksofutilitiesandinsurancecompanies.

Wehavebeenkeepingdataoncommonstocksinacoupleofdifferentways,andwefindthatthisargumentislargelywithoutmerit.

Fromthe1980stotheearly2000s,theNYSEpublishedA-Ddataonwhatitcalled“commononly”stocks.ButtheNYSE’smethodologywasnotwhatitshouldhavebeen;theyjustfilteredforissueswhosesymbolshad3lettersor

less.Thatgotridofthepreferredstocksandotherissueswithsymbolsuffixes,butstillallowedinthebondCEFs.

StartingonFeb.9,2005,theNYSEchangeditsproceduresfortabulatingthe“commononly”stocks,eliminatingwhattheycalled“derivatives”,includingthebondCEFs.TheNYSEalsoreformulatedtheNYSECompositeIndex($NYA)toincludeonlyrealcommonstocks,andfurthermoretoonlyincludeoneclassofcommonstockforeachlistedcompany.Soifacompanyhad“B”or“C”shares,itdidnotgetadditionalvotes.

ItwasaroundthatsametimewedecidedtostartourownprojecttomorethoroughlyexaminethishypothesisthatthebondCEFswerecontaminatingtheoveralldata,andthattheproperdatatowatchwerethe“commononly”.UsingdataonallNYSE-listedissues,webuiltourowndatabaseofA-DandUV-DVdata,andbrokendownintoseveralsubcategoriesincludingcommononly,bondCEFs,ETFs(whichtheNYSEmovedtoNYSEMKTinlate2007),preferredstocks,foreignstocks,and“specialty”whichiswherewereputalloftheotheroddsandends.

Keepingupwiththisefforthasbecomemoredifficult,becausetheNYSEnolongerpublishesitslistofthecomponentsoftheNYSECompositeIndex(whicharethecommononlystocks).SowehavebeenlefttomakeourowndecisionswhennewissuesjointheNYSElisttodeterminewhatcategorytheyshouldbein.

WeunderstandthatthestaffatStockCharts.comhasundertakenasimilarefforttoderivethecommononlyA-Ddata.Youcanseethoseinthesymbolcatalog;justsearchonthewordcommon.

OneofthefirstfindingsfromourstudyisthatwedonotseeasmanyofthesametypesofclassicA-DLinedivergencesversuspriceswhenlookingattheCommonOnlyA-DLine.HereinChart10-9isanexampleofwhatwemean:

Chart10-9

Bycontrast,theBondCEFA-DLinemayactuallybeabetterindicationofliquidityconditionsthananythingelse.Chart10-10belowtakesalookatthe2007stockmarkettop,whichsawtheSP500finallymakeitshighesttopinOctober2007.TheCommonOnlyA-DLineandthecomposite(allissues)A-DLinehadseenapeakinJune2007,sotherewasaclassicA-DLinedivergencebythetimethefinalpricehigharrived.

ButtheBondCEFA-DLinehadpeakedevenearlier,backinMay2007,givingevenmoreadvancedwarningaboutthedryingupoftheliquiditypool.AndasthefinalpricehighwasbeingmadeinOctober2007,onceagaintheBondCEFA-DLinewaslookingweakerthantheCommonOnlyversion.

Chart10-10

Turningtoamorerecentexample,Chart10-11showsacomparisonjustbetweentheSP500andtheBondCEFA-DLinefor2014-15.

Chart10-11

WhenthereisadisagreementbetweentheBondCEFA-DLineandtheSP500,itisworthpayingattentiontothemessagefromtheBondCEFA-DLine.ThepointtotakefromthisisthatthehypothesisaboutbondCEFscontaminatingthedataisoffbase.Ifanything,theyaremakingtheoverallA-Ddatabetterfortheirinclusion,asstrangeasthatmaybetobelieve.

ThoughtsontheContinuingValidityoftheA-DLineWhilethecriticismsoverthesupposed“contamination”oftheA-Dwillnodoubtcontinueforever(becausesomepeoplecannothandlethetruth),wewouldurgeeveryonetotakeitasitisandlearntobenefitfromitsmessages.Whatmanytechnicians,andmostfundamentalists,donotunderstandisthattheA-DLineisstillthebestindicationofliquidityoutthere.EveryissuethatgetsavoteinthedailyA-Dstatisticsrepresentsawarbetweenthebullsandthebears,andsoreviewingtheoverallbattlefieldstatisticsgivesusausefulreviewofhowthewarisgoing.

Thisliquidityconceptisoftenlostonanalystswhofocusonearningsprojections,dividendyields,bookvalue,andotherfundamentalfactors.Intruth,thereareonlytwofundamentalfactorswhichmatterwhenitcomestothesubjectofwheretheoverallmarketisgoing:(1)Howmuchmoneyisthere?and(2)Howwillingisthatmoneytobeinvestedinstocks?Thefirstoftheseexplainswhyliquiditymatters,andthesecondexplainswhysentimentindicatorsmatter,sinceinvestorswhoarealreadybullishcannotgetmorebullish.

ToseehowtheA-DLinemattersintherealworld,takealookatthecomparisoninchart10-12.Theratio-adjustedNYSEA-DLineisontop,andthebottomlineshowsafter-taxcorporateprofitsasapercentageofGDP.Whatthisillustratesisthatwhenliquidityisstrong,therebydrivinguptheA-DLine,italsohelpscompaniesachieverelativelygreaterprofitability.Perhapsevenmoreimportant,wecanseewhattheA-Ddataaredoingeverydayinrealtime,whereaswehavetowaitforthecorporateprofitsandGDPdatatogettabulatedandreported,andthenlatertogetrevised.ThisiswhyitisimportantforeventhefundamentaliststofollowwhattheA-DLineisdoing.

Chart10-12

TheRelationshipbetweenanExponentialOscillatoranditsSummationIndexbyJamesR.MiekkaandRichardG.Miekka

TheMcClellanOscillatorandSummationIndexThepurposeofthisarticleistoshowthatthereisasimple,directmathematicalrelationshipbetweentheMcClellanOscillatoranditsSummationIndex,andtoderivethatmathematicalrelationship.Thesecondpartshowstherelationshipusingasimpleralgebraicstep-by-stepformat.

TheMcClellanOscillator(MCO)anditsSummationIndex(MCOSI)arestandardtoolsoftechnicalanalysisofstocksandstockindexes,whichareincludedinmosttechnicalanalysiscomputerprogramsandlistingsoftools/indicators.

TheMCOisthedifferencebetweentwoexponentialmovingaverages(EMAs)or“trends”ofthe(daily)differencebetweenthenumberofadvancingandthenumberofdecliningissuesononeofthestockindexes(NYSE,NASDAQ,etc.),butmostcommonlytheNYSE.ThetwoEMAsarecalledthefastandslowtrendsorindexes.Specifically,ShermanandMarianMcClellanhavechosenthe19-day(10%)EMAminusthe39-day(5%)EMAasthevalueofMCO.TheMCOSIisthesumofallconsecutivevaluesoftheMCO,starting(byconvention)atavalueof+1000whenbothexponentialmovingaveragesarezero.

Early in 1991 JamesMiekka determined that theMCOSI could be calculateddirectly from the fast and slow trends of theMCO. Prior to that time, it wasgenerallyassumedthattheSummationIndexwasdependentonlyonthehistoryoftheOscillatorandwasnotmathematicallyrelatedtothethen-currentvaluesofthefast (10%)andslow(5%) trends.Jamesdisclosedhisequation toShermanMcClellan shortly after its derivation, and itwas soon published in TechnicalAnalysis of Stock and Commodities1 as part of an interview between themagazine and Sherman McClellan, and dubbed the “Miekka method” forcalculating MCOSI. Since then, the formula has been widely used, but itsmathematical derivation has never been published.This articlewill showhowtherelationshipbetweentheMCOandtheMCOSIwasderived.

Letusbeginwith a reviewof themathematical expressions for theMcClellanOscillator,itsfastandslowtrends,anditsSummationIndex.

TheMCOisgivenbytheexpression:Equation1:MCOn=Fn–Sn

WhereFisthefaster,or10%trend(EMA),Sistheslower,or5%trend(EMA),andthesubscriptndenotesthenthvalueofMCOanditstrends.Inturn,FandSaredefinedbytheequations:Equation2:Fn=Fn-1(0.9)+ n(0.1),andEquation3:Sn=Sn-1(0.95)+ n(0.05),Where nisthenew(current)value of daily advancing minus declining issues on the New York StockExchange,andthesubscriptn-1denotesthepreceding(yesterday’s)valueofSorF.

Notethat canbepositiveornegative,soS,F,andMCOcanalsobepositiveornegative.

TheMcClellanOscillatorSummationIndex(MCOSI),whichisthesumofalloscillatorvaluesbeginningatsomeconvenientstartingpointorzeropoint,canbeexpressedmathematicallyas:Equation4:nMCOSIn= MCOii=0

wherethesubscriptireferstotheithvalueoftheOscillator.

Inmoregeneralizedtermsletusexpressthemultiplier(0.1)forthefastertrendbythe letterP,andthemultiplier(0.05)for theslower trendasQ,becausewemay not always want to use 0.1 and 0.05 as the multipliers. Thus: Equation2a:Fn=Fn-1(1-P)+ n(P),andEquation3a:Sn=Sn-1(1-Q)+ n (Q),The10% trendof theMCO is nominally a 19-dayEMAand the5%trend is nominally a 39-dayEMA,where the number of days in each trend isgivenbytheformulaEquation5:P=2/(DP+1),andinthecaseoftheMcClellanOscillator,P=2/(19+1)=0.1

Equation5a:Q=2/(DQ+1),andinthecaseoftheMcClellanOscillator,Q=2/(39+1)=0.05

WhereDPandDQarethenominaldurations(days)ofthefasterandslowertrendsusingthemultipliersPandQ.About86.5%ofthevaluesofFandSarecontributedbytheirchangesinthelastDPandDQdays,respectively.

Letusnowexamineashortsequenceofdayswith choseninsuchawaythatwecanobservetherelationshipsamongF,S,MCO,andMCOSI,andinparticulartherelationshipbetweenMCOandMCOSI.

Althoughthesequencechosenisshort,andthevaluesof werechosentoillustratecertainfactors,thesamebehaviorwouldbeobservedforverylongsequencesof .

Fromthedata,onecanmakethefollowingobservations;

1.IfMCOSIispositiveandMCOis0thenifthenext is0,MCObecomesnegative(days7&8).

2.IfMCOSIisnegativeandMCOis0,thenifthenext is0,MCObecomespositive(days15&16).

3.Ifonerepeatedlyentersthevalueof0for ,onereturnstothestartingvaluesforF,S,MCO,andMCOSI,whichinourcaseareallequaltozero(days153&154).

Thus,onecanseethatsomedirectmathematicalrelationshipmustexistbetweenMCOandMCOSI,sinceMCOSIcanneverdriftoffintovaluesunrelatedtothethen-currentF,S,andMCO.

TheNeutralPointConceptWeobservedthatifMCO=0,thenifthenext =0,MCOrisesifMCOSIisnegative,andfallsifMCOSIispositive.WhatvaluewouldMCOneedtohaveinorderthatitwouldnotchangeif =0?Letuscalculate,ingeneral,howtoarriveatsuchavalueforMCO,startingfromanyrandomMCO.Todothiswewilldeterminethe requiredtomovetheMCOtoanewvaluefromwhich,ifthefollowing =0,thenMCOwillbeunchanged.Letuscallthisthe“neutralpoint”andusethesubscript“NP”todesignatethemathematicalfunctionsthatrelatetotheneutralpoint.Thefollowingequationmustbesatisfiedinordertoarriveattheneutralpoint:Equation6:

MCONP=[F(1-P)+ NPP]–[S(1-Q)+ NPQ]={[F(1-P)+ NPP](1-P)+ P}–{[S(1-Q)+ NPQ](1-Q)+ Q}

Where ontherighthandsideoftheequationiszero,sotheequationsimplifiesto:MCONP=[F(1-P)+ NPP]–[S(1-Q)+ NPQ]={[F(1-P)+ NPP](1-P)}–{[S(1-Q)+ NPQ](1-Q)}

Where:FandSarevaluesofthefastandslowEMAtrendsatanyrandompoint, NPisthe requiredtomoveMCOtoitsneutralpoint,andMCONPisthe“neutralpoint”valueoftheMCO.

Solvingfor NPintermsofF,S,PandQyieldstheequation:Equation7: NP=

FP(1-P)-SQ(1-Q)(Q2-P2)Substitutingequation7into(therighthandsideof)equation6yieldsthefollowingformulaforMCONP:Equation8:OscNP=

MCONP=F(1-P)-S(1-Q)+(FP2-FPQ)(1-P)–(SQ2–SPQ)(1–Q)(Q2–P2)InthecaseofthestandardMCOwhereP=0.10andQ=0.05,thisequationreducesto:Equation9:MCONP=9F-19S

30

WhileroutinelycalculatingMCO,MCOSI,andMCONP,oneofus(James)notedthata),whenMCOSIwaspositive,MCONPwasnegative,b),whenMCOSIwasnegative,MCONPwaspositive,andwhenMCOSIwaszero(or+1000inthecaseofthestandardMCOSI),MCONPwasalsozero,leadingtothesuggestionthataninversemathematicalrelationexistedbetweenMCOSIandMCONP.

Finally,ifonemultipliesMCONPby–30,onegetsexactlyMCOSI.TheformulafortheMCOSIusingtheconventionalvaluesofXF=0.10andXS=0.05thusbecomes:Equation10:MCOSI=(-30)(9F-19S)=19S–9F

30

And,ifoneadjustsforthefactthat,byconvention,thepublishedMCOSIisnormallyincreasedbyaconstantof1000:Equation10a:MCOSI=1000+19S–9F,orEquation10b:MCOSI=1000+MCO+20S–10F

Equations10aand10barethecommonlypublishedformsofthe“Miekkamethod”forcalculatingtheMcClellanSummationIndex.

Acknowledgement:TheauthorswishtothankSuzanneSchulzofGreelyColorado,RichardA.FotlandofFranklin,MA,andJamesandEdwardHansonofMaynard,MAfortheirhelpfulsuggestionsinclarifyingthetextandnomenclatureandcorrectingsomewronglytransposedequations.

AStep-by-StepProcessThederivationofthemathematicalrelationshipbetweenMCOandMCOSIwasstraightforward,butcontainedrathercomplexalgebraicformulas.HereisanotherwayofcalculatingtheneutralpointOscillatorandSummationIndexconsistsofasixstepprocessasfollows:Step1:AddtheMcClellanOscillatortoits10%trend(=MCO+10%)Step2:Divideby

3(=[MCO+10%]/3)Step3:SubtractabovefromMCO(=MCO-[MCO+10%]/3)Step4:Multiplyby-30(=-30*{MCO-[MCO+10%]/3})Step5:Add1000(=1000-30*{MCO-[MCO+10%]/3})Step6:AddMCO(MCOSI=1000+MCO-30*{MCO-[MCO+10%]/3}=1000+19*(5%)-9*(10%)Thelogicoftheaboveisasfollows:Step1:Calculatethevalueadvancesminusdeclines(A-D)thatwouldkeeptheOscillatorunchanged(i.e.,thatwouldmaketomorrow'sOscillatorthesameastoday'sOscillator):(A-D)nc=2*(10%)-(5%)=MCO+(10%)Where(A-D)ncisthe"nochange"valueofadvancesminusdeclinesneededtokeeptheOscillatorunchanged,and(10%)and(5%)arethetenpercentandfivepercenttrends,respectively.

Step2:IfwehappentobeatMCOSI=+1000,andiftheMCOisat,say,+100,thentokeepitunchanged,A-Dwouldhavetobe+300.Or,iftheOscillatorwereat+150,thenA-Dwouldhavetobe+450tokeepMCOunchanged.Ineachcase,theOscillatorvaluewouldbegivenbytheformula:MCOnc@neut.=(A-D)nc/3.

WhereMCOnc@neutisthevalueMCOwouldhaveifMCOSIwereatitsneutralorzeropointof+1000

So,forthemoment,let'spretendthattheSummationIndexisat+1000.Ifthisistrue,thenMCOncisgivenbytheformulaabove.

Step2:Divide(A-D)ncby3,orMCOnc@neut=(A-D)nc/3=(MCO+10%)/3

Step3:ButsinceMCOSIisnotreallyat+1000,wemustmakeanadjustmenttofindMCOncforourreal-worldcase.ThisisaccomplishedbysubtractingMCOnc@neutfromThecurrentvalueforMCO:Step3SubtractMCOnc@neutfromMCO,orMCOnp=MCO-(MCO+10%)/3

WhereMCOnpisthevalueMCOthatwillbeunchangedifthenext(A-D)iszero.

Step4:WhenroutinelycalculatingthedailyvaluesofMCOnpandMCOSI,Jamesnotedthatthereisaninverserelationshipbetweenthetwo,andthatthefactoris-30.

Step4:MultiplyMCOnpby-30

Step5:Byconvention,weadd1000tothe"natural"valueoftheSummationIndex.

Step5:Add1000

Step6:Thenumberobtainedinstep5turnsouttobeyesterday'sMCOSI,soweneedtoaddMCOtogettoday'sMCOSI.

Step6:addMCO

Thefinalformulabecomes:MCOSI=1000+MCO-30*[MCO-(MCO+10%)/3]

=1000+MCO-30(MCO)+10(MCO)+10(10%)=1000-19(MCO)+10(10%)=1000-19(10%)+19(5%)+10(10%)=1000+19(5%)-9(10%)Thefinalformulaisthesameastheformulaobtainedusingalternatealgebraearlierinthisarticle.

JimMiekkaactuallyusesthefirstMCOSIformulaintheaboveseriesinhisowncalculationsoftheSummationIndex,whichhedoesinhishead.

Ofcourse,therealvalueoftheMiekkaformulaisthatwhenitisused,theMCOSIbecomesself-correcting,soanyerrorsisaddingupallthevaluesofMCOareeliminated.AdriftinMCOSIwillalmostalwaysoccurinthe"add-up"method,eveniftherearenomistakesintheMCOvalues,unlessthevaluescontainaverylargenumberofsignificantfigures.

ThesecondpartoftheMCOSIderivationexplainstherelationbetweenanyoscillatorthatisthedifferencebetweentwoexponentialmovingaveragesanditssummationindex.Thesummationindex(SI)canbecalculatedfromthefollowingformula:SI=C+Osc+S/Q-F/P

Where:SIisthesummationindex,Cisanarbitraryconstant,ifused,OscistheOscillator,calculatedasthedifferencebetweenafastertrend(F)andaslowertrend(S),Pisthemultiplyingfactorforthefasttrend,calculatedas2/(N+1),whereNisthenumberofunits(typicallydays)onwhichthefasttrendisbased.InthecaseoftheMcClellanOscillator,P=2/(19+1)=0.1

Qisthemultiplyingfactorfortheslowtrend,calculatedas2/(N+1),whereNisthenumberofunits(typicallydays)onwhichtheslowtrendisbased.InthecaseoftheMcClellanOscillator,Q=2/(39+1)=0.05.

McClellanSummationIndexBuySignalbyJamesR.Miekka

TheMcClellanSummationIndexBuySignaloccurswhenthenormalizedNYSEMcClellanSummationIndex(MCOSI)risesabove+1500.ThesignalremainsineffectuntilthenormalizedSummationIndexdropsbelow+1500.TonormalizetheMCOSI,the5%and10%componentsoftheMcClellanOscillator(MCO)arecalculatedfrom“normalized”valuesforadvancesminusdeclines,(A-D)norm,calculatedbytheformula:(A-D)norm=(A-D)*(2000/currenttotalissuestraded).Thereasonfornormalizingto2000totalissuesishistorical.Theoriginalworkwasdonewhentherewere,infact,about2000issuestradedontheNYSEeachday.ThepurposeofthenormalizationistocompensatefortheincreasingnumberofissuestradedontheNYSEovertime.Forinstance,ifthetotalnumberofissuestradedisat3500perday,theregular(notnormalized)MCOSIwillbeatabout+1875whenthenormalizedMCOSIisat+1500.

ThehighertheSummationIndex,thegreaterthetendencyforthemarkettorise.Thiscanbedefinedmathematicallybynotingthatforevery1000pointincreaseintheSummationIndex,ittakes100additionaladvancesminusdeclinestokeeptheSummationIndexatthatlevel(i.e.,tokeeptheMcClellanOscillatoratzero).Byconvention,theSummationIndexisclassifiedasneutralat+1000.Thus,ataMCOSIof+2000,theremustbe100moreadvancesthandeclineseachday,or500perweek,tokeepMCOSIconstant.UsingtheestimateofMichaelBurke,ofInvestorsIntelligence,thatthereare600NYSEadvancesminusdeclinesforeach1%increaseinthemarket,thiswouldequatetothemarketchangesvs.MCOSIvaluestabulatedbelowinTable10-2.

Table10-2

IfMCOSIishighandsteady,butthemarketisfalling(orrisingataratelessthanthelistedvalues),thismeansthatthereisapositivedivergencebetweentheA-Dbreadthandthemarket,andindicatesthathigherpricesaretocome.Conversely,ifthemarketisrisingfasterthanthetabulatedvalueswouldindicate,thisisasignofnegativedivergenceandthemarketislikelytoturndown,sincethedivergenceactsasaleadingindicator.

TheMiekkaFormula,whichgivesthemathematicalrelationbetweentheMCOSIandthecomponentsoftheMCO,arosefromastudytodeterminethenumberofadvancesminusdeclinesneededtoholdtheMCOconstantatdifferentSummationIndexlevels.

InformationabouttheMcClellansandJamesR.Miekka

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TheMcClellanMarketReport

Ourtwicemonthlynewsletter.Thecostis$195.00peryear.Everyissuecontainsouruniqueanalysisofmarkettrendsasdescribedbythelargesetof

technicaltoolswefollow,includingtheMcClellanOscillatorandSummationIndex.WealsoprovideourproprietaryTimingModeldatesofforecastedfutureturningpointsforstocks,bonds,andgold.OurBottomLineappearsonthefirstpageofeveryissueandsumsupourexpectationsforthemarketduringtheweeksthatfollow.

http://www.mcoscillator.com/user/041015.pdfTheDailyEdition

MarketfollowerswhoneedaccesstomorefrequentinformationaboutmarketmovementsenjoyreadingourDailyEdition.Itispublishedeverydaythemarkettrades,andgoesoutintheeveningviaPDFattachmenttoanemail.EachEditioncontainsalargetableofdataincludingMcClellanOscillatorcalculationsfortheNYSEandNasdaq,andevenforthe100stocksintheNasdaq100Index.WealsoprovidecalculationsofPriceOscillatorsandimportantsupport/resistancelevelsforthemajorstockmarketaverages,gold,andT-Bonds.Activemutualfundtradersappreciateour"CurrentOpinions"sections.Wegiveourcurrenttake,eitherbullish,bearish,orneutralonstocks,bonds,andgold.

ChartInFocus

Afreeweeklyarticleonasingletopic,designedtohelpeveryonelearnmoreabouttechnicalanalysisandaboutthetoolsweuse.

JamesR.Miekka

Jim’sFather,RichardprovidedmewithJim’sObituary.IspokewithJimonthephonemanytimes;whatatragicloss.Hesharedhisworkwithmewithoutconcern.

JamesRichard(Jim)Miekkawhowasblind,waswalkingonthesideofaroadonthemorningofAugust19,2014withhisguidedog,Zoey,whenhewasstruckbyanSUV.Hewaspronounceddeadatthescene.Soendedafascinatingcareerthatspanned54yearsandencompassedperiodsofbothgloryandtragedy.

JameswasborninMassachusettsonJuly21,1960.Hehadaratherordinarychildhoodthatwaspunctuatedwithglimpsesofspecialabilities.Hestartedtotalkat8months,andbegantoreadwhenhewasthree.Attheageof8,histeacheraccusedhimofcheatingonanarithmeticexambecausehewrotedowntheanswerswithoutshowinganycalculations.Whenhismotherwascalledittodiscusshiswaywardbehavior,momaskedthathebebroughtintotheconferenceroomtodemonstratehisabilitytodothecalculationsmentally.Theinterrogators

wereaskedtopickanytwo3-digitnumbersandtowritethemonablackboard.Jimstoodattheblackboardandcorrectlywrotetheanswerwithoutmakinganyothernotations,absolvinghimselfofthecheatingaccusation.

Jimbecameintenselyfocusedonanysubjectthatcaughthisfancy.Aftertheusualabsorptionswithdinosaurs,plants(especiallycactusplants),andplanets,hebecameenthralledwithbicycles,andeventuallymadetwotranscontinentalroundtripsfromMassachusettstoCaliforniabybicyclewhenhewas16,thenagainwhen20.Hewasalsoveryproudofgettingaspeedingticket(vehiclemodelSchwinn)forgoing55MPHdraftingbehindatruck.

Incollege,JimearnedaBSdegreeinEnvironmentalSciencewithaminorineducationandthenbecameemployedasahighschoolscienceandmathteacherinBrawley,California.Jameslosthiseyesightin1986followinganexplosionfromachemicalexperiment.Heandhisbrotherweretryingtofindabetterwaytoextractmineralsfromrock,butthechemicalscausedanexplosionthatdamagedhishandsandeyes.Heultimatelywasblindedbycomplicationsduringanensuingeyeoperation.“ThelastthingIsawwastheeyechartgoingintosurgery,”hetoldWSJjournalistStevenRussolilloin2010.

Asherecuperated,Jamesbeganlisteningtotelevisionshowsthatfocusedoninvesting.HebecameinterestedintechnicalanalysiswhilefollowingKennedyGammageonFNN.Hethenstartedactivelytradingstocks,andbeganwritingafinancialnewsletterundercontractfromalocalfinancialadviser.HemetandbecameaclosecorrespondentwithGammagewhohadderivedsomeofhisownindicatorsfromtheworkofShermanandMarianMcClellan,creatorsoftheMcClellanOscillatoranditsassociatedSummationIndex.EventuallyJimbegansellinghisnewsletter,whichhenamedtheSudburyBullandBearReport,toanumberofinterestedinvestorsandfinancialadvisors.HisgreatestreasonfortheSBBreport,though,wastohelporganizehisownthoughtsforpersonalinvesting.SinceJimwasblind,hedictatedtheweeklyupdatestohisfather,Richard,whoactedassecretary/editorforthenewsletter.

TheMcClellanOscillator(MCO)anditsSummationIndex(MCOSI),calculatedfromthedailystockadvanceanddeclinevalues(A-D)fortheNYSE,wereprominentlyfeaturedinJim'snewsletter,andhespenttimeonhislongwalkswithhisguidedogthinkingaboutwaystoimproveontheexistingformulas.Eventually,afternotingthattheOscillatorchangedbydifferingamountsforagivenA-Dvalueathighvs.lowSummationIndexvalues,Jimstartedcalculatinga"neutralpoint”,whichwasthetheoreticalA-Dvaluethatwouldleavethe

Oscillatorunchangedthefollowingday.AftersometimehenotedthattheneutralpointbehavedinverselytotheSummationIndex,andfoundthatthemultipliertoconvertbetweentheneutralpointandtheSummationIndexwas-30.

ItturnsoutthatnobodyhadpreviouslynotedthattherewasasimpledirectmathematicalrelationshipbetweentheMCOandtheMCOSI,sowhenJimpublishedtheformula,itwasquicklytestedandthenadoptedbyvirtuallyeverybodyusingthoseindicators.ItisnowknownastheMiekkaFormula.

Jimmadenumerousmodificationstothepublishedmathematicalindicatorformulasofothertechnicians,someofwhichhepublishedinhisnewsletter,andsomeofwhichhehadnotdisclosedatthetimeofhisdeath.Hefoundthat,onaverage,shorttermindicatorsremainedvalidformoreyearsthandidlongertermindicators,sostudiedstringingtogethergroupsofshorttermindicatorstocreateinvestmentsystems.Someoftheseworkedwellforatime,butmostfadedasstockmarketindexesandinvestmentvehicleschanged(evolved)overtime.Thenecessitytocreatetimelynewpredictors/indicatorswasanincentiveforJimtocontinuethenewsletter.Becausehecouldnotsee,Jimseldomusedchartsorgraphs,butconcentratedonformulas.

HismostfamousindicatorwastheHindenburgOmen,amodifiedandrestrictedversionofanindicatorearlierpublishedbyMartinZweig,thentweakedbyGeraldAppel.TheOmen(activatedwhenNYSEdailynewhighsandnewlowseachexceedathresholdlevelandalsomeetsseveralothercriteria)hasshownupwithin60daysbeforeeverymajorstockmarketplunge,buthasgivensomanyfalsealarmsthatitisusuallyignoredbyinvestors(butmakesmanynervousnonetheless).Jimsoughtwaystoreducethefalsealarms,suchasrestrictingthetypesofstocksinthesignal,butneverfoundamagicfix.

Jim'sfavoritehobbywastargetshootingwithpistolsandrifles.Aswitheverythinghepursued,Jimimmersedhimselfwholeheartedlyinthisleisuretimeactivity,anddevelopedtheabilitytoscoreinthe90's(perfectscore100)shootingatstandardNRArifletargetsfromadistanceof100yards,andoccasionallyat200yards.Toaccomplishthisfeat,Jimdesigned,withsomesightedhelp,acustomapparatusthatconvertedlightintosound,andallowedhimto"hear"histargets.NowthisscopeisbeingstudiedbyMichiganStateUniversityasanaidfortheblind.JimwithhisshootingapparatuscanbeseeninactiononYouTubebyGoogling"blindmarksman."

Jimwasactiveincharitableactivities.Hespenttimeasanunpaidtutoratalocal

highschool,andheraisedmorethan$3,000fortheFlorida-basedorganizationBlindAmericansbywalking130milesfromitsheadquartersinHernandotoSt.Petersburg.HeusedaglobalpositioningsystemandZoey,hisguidedog,andcompletedthewalkinaweekandahalf.

AsanadvocatefortheblindhewasvicepresidentofBlindAmericansinHernandoFlorida,oncewalking130milesfromhishomeinHomosassatoSaintPetersburgtoraisefundsfortheorganization.Channel9TVdocumentedhiseffort.AtothertimesJim’sactivitieshaveappearedinTheTampaBayTimes,TheTAMPAtribune,TheBangorTimes,DerSpiegelinGermany,andBBCinEnglandandonCNBCtelevision,buthismostimportantlegacycamefromthewayhelivedhisdaytodaytodaylifereplacingfearwithfaithanddespairwithhopewithamessagethatotherscandoittoo.

JamesissurvivedbyhisgirlfriendSusanTate,parents,RichardandJeanetteMiekka,abrother,FrederickMiekka,andasister,CynthiaBordas.

Chapter 11 - Non-Internal BreadthIndicatorsThischapteriscompletelynew;thefirsteditionofthebookhadaninterviewwithmyco-workersatStadionMoneyManagement.WhenthefirsteditionwaspublishedIdecidedtoonlyincludeinternalmarketbreadthwhichIviewedasadvances,declines,upanddownvolume,newhighsandnewlows.However,thereareotherbreadthmeasureswhichIshouldhaveincludedsuchastheBullishPercentIndices,thePercentaboveamovingaverage,CarlSwenlin’sParticipationIndices,andafewbreadthindicatorsthatuseUSCommonStocksOnly.Becausetheseareconsiderablydifferent,I’mgoingtodeviatefromthechaptersetupIoutlinedearlier.

Note:MuchofthecontentinthischapterwasgleanedwithpermissionfromStockChart.com’sChartSchool.

PercentAboveMovingAverageIntroduction

Thepercentageofstockstradingaboveaspecificmovingaverageisabreadthindicatorthatmeasuresinternalstrengthorweaknessintheunderlyingindex.The50-daymovingaverageisusedfortheshort-mediumtermtimeframe,whilethe150-dayand200-daymovingaveragesareusedforthemedium-longtermtimeframe.Signalscanbederivedfromcrossesabove/below50%andbullish/bearishdivergences.OnStockCharts.comtheindicatorisavailablefortheDow,Nasdaq,Nasdaq100,NYSE,S&P100,S&P500andS&P/TSXComposite.SharpChartsuserscanplotthepercentageofstocksabovetheir50-daymovingaverage,150-daymovingaverageor200-daymovingaverage.

Calculation

PercentaboveMA=(numberofstocksabove50-daymovingaverage)/(totalnumberofstocksinindex)Nasdaq100example:60/100=.60or60%

S&P500example:80/500=.16or16%

DowIndustrialsexample:7/30=.2333or23.33%

Calculationisstraightforward.SimplydividethenumberofstocksabovetheirXX-daymovingaveragebythetotalnumberofstocksintheunderlyingindex.TheNYSEIndex(Chart11-1)shows60%stocksabovetheir200-daymovingaverage.Asthechartshows,theseindicatorsfluctuatebetweenzeropercentandonehundredpercentwith50%asthecenterline.

Chart11-1

Interpretation:Thisindicatormeasuresthedegreeofparticipation.Breadthisstrongwhenthemajorityofstocksinanindexaretradingaboveaspecificmovingaverage.Conversely,breadthisweakwhentheminorityofstocksaretradingaboveaspecificmovingaverage.Thereareatleastthreewaystousetheseindicators.First,chartistscanobtainageneralbiaswiththeoveralllevels.Abullishbiasispresentwhentheindicatorisabove50%.Thismeansmorethanhalfthestocksintheindexareaboveaparticularmovingaverage.Abearishbiasispresentwhenbelow50%.Second,chartistscanlookforoverboughtoroversoldlevels.Theseindicatorsareoscillatorsthatfluctuatebetweenzeroandonehundred.Withadefinedrange,chartistscanlookforoverboughtlevelsnearthetopoftherangeandoversoldlevelsnearthebottomoftherange.Third,bullishandbearishdivergencescanforeshadowatrendchange.Abullishdivergenceoccurswhentheunderlyingindexmovestoanewlowandtheindicatorremainsaboveitspriorlow.Relativestrengthintheindicatorcansometimesforeshadowabullishreversalintheindex.Conversely,abearish

divergenceformswhentheunderlyingindexrecordsahigherhighandtheindicatorremainsbelowitspriorhigh.Thisshowsrelativeweaknessintheindicatorthatcansometimesforeshadowabearishreversalintheindex.

Chart11-2showsthepercentofstocksabovetheir200-dayEXPONENTIALaverage.Keepinmindthatbecausetheexponentialaveragehugsthedatacloser,moveawayfromitismoredifficultandthereforewillnotshowthehighandlowreadingsthatyougetwhenusingtheSIMPLEmovingaverage.

Chart11-2

50%ThresholdExamplein2008

The50%thresholdworksbestwiththepercentofstocksabovetheirlongermovingaverages,suchasthe150-dayand200-day.Thepercentofstocksabovetheir50-daymovingaverageismorevolatileandcrossesthe50%thresholdmoreoften.Thisvolatilitymakesitmorepronetowhipsaws.Thechartbelow(11-3)showstheNYSEComposite%Above200-dayMA($NYA200R).The

horizontalbluelinemarksthe50%threshold.NoticehowthislevelactedassupportwhentheNYSEwastrendinghigherin2007.Theindicatorbrokebelow50%attheendof2007andthe50%levelturnedintoresistancein2008,whichiswhentheS&P100wasinadowntrend.Theindicatormovedbackabovethe50%thresholdinJune-July2009.

Chart11-3

Eventhoughthepercentofstocksabovetheir200-daySMAisnotasvolatileasthepercentofstocksabovetheir50-daySMA,theindicatorisnotimmunetowhipsaws.Inthechartabove,therewereseveralcrossesinAugust-September2007,November-December2007,May-June2008andJune-July2009.Thesecrossescanbereducedbyapplyingamovingaveragetosmooththeindicator.Thepinklineshowsthe20-daySMAoftheindicator.Noticehowthis“smoothed”versioncrossedthe50%thresholdfewertimes.

Divergence

Chart11-4showsthePercentabovetheir200-dayaverage.Italsoshowshowthatpercentwilldivergewithprice(topplot)atmajorchangesindirection.Keepinmindthatthesecanlastaverylongtimeandmakethedifficulttotrade.Also,donotmakethemistakeofthinkingthereissupportandresistanceinthesetypesofdata–supportandresistancecanonlybeusedwithdirectpricedata.

Chart11-4

Chart11-5showsthePercentAboveMovingAveragesusinga50-daysimpleaverage.Asyouwouldexpect,itmovesconsiderablymorebecausepricesmoveaboveandbelowtheir50-dayaveragemorethantheir200-dayaverage.Youcouldletthe50dayalertyoutopayattentiontothe200day.

Chart11-5

Chart11-6showsthePercentAboveMovingAverageusingthe50-dayExponentialaverage.Similartothe200-dayversionthe50dayexponentialmovesconsiderablymore.Thisisbecausetheexponentialaveragehugsthedatatighterandalwaysreversesdirectionwhenpricemovesthroughit.Simpleaveragesdonotdothat.

Chart11-6

Conclusions:Thepercentageofstocksaboveaspecificmovingaverageisabreadthindicatorthatmeasuresthedegreeofparticipation.ParticipationwouldbedeemedrelativelyweakiftheS&P500movedaboveits50-daymovingaverageandonly40%ofstockswereabovetheir50-daymovingaverage.Conversely,participationwouldbedeemedstrongiftheS&P500movedaboveits50-daymovingaverageand60%ormoreofitscomponentswerealsoabovetheir50-daymovingaverage.Inadditiontoabsolutelevels,chartistscananalyzethedirectionalmovementoftheindicator.Breadthisweakeningwhentheindicatorfallsandstrengtheningwhentheindicatorrises.Arisingmarketandfallingindicatorwouldraisesuspicionsonunderlyingweakness.Similarly,afallingmarketandrisingindicatorwouldsuggestunderlyingstrengththatcouldforeshadowabullishreversal.Aswithallindicators,itisimportanttoconfirmorrefutefindingswithotherindicatorsandanalysis.

BullishPercentIntroduction:TheBullishPercentIndex(BPI)isabreadthindicatorbasedonthenumberofstocksonPoint&Figurebuysignalswithinanindex.DevelopedbyAbeCoheninthemid-1950s,theBullishPercentIndexwasoriginallyappliedtoNYSEstocks.CohenwasthefirsteditorofChartCraft,whichlaterbecameInvestorsIntelligence.BPIsignalswerefurtherrefinedbyEarlBlumenthalinthemid70'sandMikeBurkeintheearly80's.BecauseastockiseitheronaP&Fbuyorsellsignal,thereisnoambiguitywhenitcomestoP&Fcharts.ThismakesBPIastraightforwardindicatorwithclearlydefinedsignals.ThisarticlewillcoversixdifferentBullishPercentIndexsignalsderivedfromPoint&Figurecharts:bull/bearconfirmed,bull/bearalertsandbull/bearcorrection.

Calculation

Thecalculationisstraightforwardandsimple.

NumberofstocksonP&Fbuysignals/totalnumberofstocks

BullishPercentcalculationsaredoneusingTraditionalboxsizingand3-boxreversalP&Fcharts.

P&FPatterns

ThereareoveradozenP&Fsignals,butonlytwobasicsignals.X'srepresentadvancingcolumnsandO'srepresentdecliningcolumns.P&Fcolumnsalternateaspricesreverseandchangedirection.AbasicP&FbuysignaloccurswhenacolumnofX'sexceedsthepriorcolumnofX's.AbasicP&FsellsignaloccurswhenacolumnofO'sexceedsthepriorcolumnofO's.It'sthatsimple–Seechart11-7.

Chart11-7

StockCharts.comusestraditional3-boxreversalP&FchartsfortheBullishPercentIndices.Eachboxrepresents2%.Thismeansittakesatleasta6%moveinBPIforareversal.Threeboxesat2%equals6%(3x2%=6%).A6%movewouldbefrom42%to48%orfrom64%to58%.6%doesnotrefertotheactualpercentagechange.AcolumnofO's(decline)canonlybereversedwitha6%advance,whichwouldformanewcolumnwiththreeX's.AcolumnofX's(advance)canonlybereversedwitha6%decline,whichwouldformanewcolumnwiththreeO's.

Chart11-8

Interpretation

TheBullishPercentIndex(BPI)fluctuatesbetween0%and100%.StockCharts.comcalculatesBPIforanumberofsectors,industrygroupsandindices.Theindicator'srangeandvolatilitylargelydependonthenumberofstocksintheunderlyingindex.Anindexwith30orfewerstocks,suchastheGoldMinersIndex,DowIndustrialsorDowTransports,mayreach0%or100%onoccasion.Indiceswithover2000stocks,suchastheNasdaqandNYSE,arehighlyunlikelytoreach0%or100%.IndiceswithfewerstocksarealsomorevolatilebecauseittakesfewerstockstomovetheBullishPercentIndex.

Initsmostbasicform,theBullishPercentIndexfavorsthebullswhenabove50%andthebearswhenbelow50%.Thebullshavetheedgewhenover50%of

stocksareonaP&Fbuysignal.BPIisalsoconsideredoverboughtwhenabove70%andoversoldwhenbelow30%.Inadditiontothesebasicinterpretations,threesignalpairingshaveevolvedovertheyears(decades).Belowisadescriptioncoveringthebasicelementsforthesesignals.Cohen,BlumenthalandBurkealsousedspecificBPIlevelstoqualifysomeoftheirsignals,suchas30%,49%,50%,52%,68%and70%.Thesignalsinthisarticlefocusonthebasicelements.

BullAlert:BPIisbelow30%andthenformsanewcolumnofX's(rises)

BearAlert:BPIisabove70%andthenformsanewcolumnofO'sthatdeclinebelow70%.

BullConfirmed:BPIisonaP&FbuysignalandinacolumnofX's(rising).

BearConfirmed:BPIisonaP&FsellsignalandinacolumnofO's(falling).

BullCorrection:BPIisonaP&Fbuysignal,butcurrentlyfalling(columnofO's.

BearCorrection:BPIisonaP&Fsellsignal,butcurrentlyrising(columnofX's).

Bull/BearAlert

Abullalertsignalsthatthemarketmaybeformingabottom.WiththeBullishPercentIndexbelow30%andacolumnofO'sunderway,thereiswidespreadweakness.Alsonoticethat30%isusedasanoversoldthreshold.Becauseanindexorindicatorcanbecomeoversoldandremainoversold,BPImustbeoversoldANDstarttorisetotriggerabullalert.ThismeansBPImustbounceatleast6%(threeboxreversal)tostartacolumnofX's(rise).TheblackarrowsonthechartbelowshowtheNYSEBullish%Index($BPNYA)dippingbelow30%andthenreversingwithacolumnofX's.Thissignalalertschartiststhatbreadthisimprovingfromoversoldconditions.Suchsignalscanforeshadowabottominstocks,suchastheBullAlertsinOctober2002,March2003andMarch2009.NotallBullAlertsresultinBottoms,butthesesignalsshouldputchartistonaheightenedstateofalert.

Chart11-9

TheBearAlertistheoppositeoftheBullAlert.TheBullishPercentIndexadvancesabove70%tobecomeoverbought.Thismeansthatover70%ofstocksinaparticularindexareonP&Fbuysignals.Asubsequent6%decline(3-box)formsanewcolumnofO'stotriggertheBearAlert(redarrows).Thisisnotasellsignal,butratheranalerttobepreparedforadeclineormarketweakness.Somesignals,suchasinJuly2007,canforeshadowbiggerdeclines(redcircle).

Chart11-10

Chart11-11showshowyoucanplottheBullishPercentwithitsassociatedIndex.Aswithmostofthesenon-internalbreadthindicators,theywillshowstrengthandweaknessearlierthanmost.

Chart11-11

Conclusions

TheBullishPercentIndexofferssomethingforallsortsoftraders.Bottompickerscanlookforbullishreversalsbelow30%.Toppickerscanlookforbearishreversalsabove70%.Thesearethemoreriskyentriesbecausetopsandbottomscanextendovertime.Theremayalsobeatestofthepriorlowsorpriorhighs.Trendfollowerscanlookforbullishreversalsoccurringabovethe50%level.Abullishbiasisalreadypresentwhenover50%ofstocksareonP&Fbuysignals.AnewcolumnofX'sabove50%signalsrenewedstrengthwhenthebiasisalreadybullish.Abearishbiasexistswhenbelowthe50%threshold.AnewcolumnofO'ssignalsrenewedweaknesswhenthebiasisalreadybearish.TraderscanusetheBullishPercentIndicestodefineatradingbiasbeforelookingfortradesinindividualstocksorETFs.BuysignalsarepreferredwhentheBullishPercentIndexfavorsthebulls.SellsignalsarepreferredwhentheBullishPercentIndexfavorsthebears.ItisimportanttousetheBullishPercent

Indexinconjunctionwithotherindicators.

ParticipationIndexNOTE:ThedescriptivematerialthatfollowswaswrittenbyCarlSwenlin,thecreatoroftheParticipationIndexes.

ThisisthecreationofCarlSwenlinwhoranDecisionPointformanyyearsandisasuperbtechnicalanalyst.DecisionPointisnotpartofStockCharts.com.TheParticipationIndex(PI)measuresshort-termpricetrendsandtracksthepercentageofstocksinagivenindexapplyingmaximumpressuretomovepriceshigherorlower.ThereareactuallytwoParticipationIndexes:ParticipationUPandParticipationDOWN.

TheParticipationIndexesaredrivenbyashort-termPriceMomentumModel(ST-PMM),whichisappliedtoeachstockintheparticularindexbeingtracked.TheST-PMMisstrictlymechanicalandisalwayssetonBUYorSELL.Foranewsignaltobegenerated,pricemust:(1)reverseatleast1%fromtheextremepriceforthecurrentsignal;and(2)passthroughthe20-dayexponentialmovingaverage(20EMA).Bothconditionsmustbemetatthesametimebeforethesignalcanchange.

Forexample,ifthemodelisonaSELLsignal,inordertochangetoaBUYsignal,pricemustrise1%fromthelowestpricereachedduringtheSELLsignal,andpricemustcrossupthroughthe20EMA.

IfthemodelisonaBUYsignal,inordertochangetoaSELLsignal,pricemustdecline1%fromthehighestpricereachedduringtheBUYsignal,andpricemustcrossdownthroughthe20EMA.

CertainconditionswillcausethemodelresultstoscoreapointforeitherUPorDOWNParticipation.Theresultsarechartedasapercentageofthetotalstocksinthemarketindexbeingtracked.

PARTICIPATION-UPisregisteredwhenoneofthefollowingoccurs:

1)ThefirstdayaBUYsignalisgenerated;

2)ThecurrentBUYsignalprofitisequaltothehighestprofitofthecurrentsignal;

3)ThesignalisaSELLsignal,butthesignalhasalosswhichisequaltothe

highestlossofthecurrentsignal.

PARTICIPATION-DOWNisregisteredwhenoneofthefollowingoccurs:

1)ThefirstdayaSELLsignalisgenerated;

2)ThecurrentSELLsignalprofitisequaltothehighestprofitofthecurrentsignal;

3)ThesignalisaBUYsignal,butthesignalhasalosswhichisequaltothehighestlossofthecurrentsignal.

Specifically,wetrackparticipationofeachstockinagivenindex.WethenseehowUPparticipation,thenumberofstocksactuallydrivingtheupmoveexpandsasthemarketmoveshigher,thencontractspriortoshort-termmarkettops.AsimilarthingcanhappenwithDOWNparticipationasthemarketisabouttobottom.BottomLine:Atrendneedsastrongpluralityofparticipationtobemaintained.

Whatwelookforareclimacticreadingsthatidentifypointswhereinternalpressureislikelytohavereachedthepointofexhaustion.Thechartbelowshowsaone-yearperiodduringabullmarket.DOWNParticipationclimaxesmostoftensignaltheproximityofapricebottom;whereas,UPParticipationclimaxesfrequentlysignalthedecelerationofthepricemove.However,theUPclimaxesshouldalwaysbeconsideredawarningthatapricetopmaybenear,andstopsshouldbeadjustedaccordingly.

Chart11-12belowshowstheupanddownparticipationindexes.

Chart11-12

AFewBreadthIndicatorsUsingCommonStocksOnlyAdvanceDeclineLineComparison

Youcanseethattheallstocksversionoftheadvancedeclineline(red)doesnotmovearoundasmuchasthecommononlyline.Personally,Istickwiththeallstocksversionsasovertheyearstryingtofindareliableuseforthecommononlyversionjustneverhappened.However,thisisabookaboutallbreadthindicators,notjustonesIlike.

Chart11-13

AdvanceDeclineLinePerformanceComparisonLookingattheperformancecomparisonoftheallstocksadvancedeclinelineandthecommononlyadvance

declineclearlyshowsthehigherbetacharacteristicofthecommononlyversion.

Chart11-14

McClellanOscillatorComparison

IthinkyoucanseethatwhenyoulookattheallstocksversionoftheMcClellanOscillatorandtheCommononlyversiontherejustisn’tenoughdifferencetosayoneisbetterthantheother.

Chart11-15

McClellanSummationIndexComparison

SimilartotheMcClellanOscillator,thedifferencebetweentheallstocksversionandthecommononlyversionisdifficulttosaywhich,ifeither,isbetter.

Chart11-16

Asyoucanseethecommon-onlyversusthetotaldohavedifferences.I’dsuggestyouworkwiththeoneyoufeelmorecomfortablewithandstickwithit.

StockCharts.comhasmanyothernon-internalbreadthindicatorsonawholehostofindicesandexchanges.IwouldstronglysuggestbrowsingtheStockCharts.comSymbolCatalog.Mostofthebreadthindicatorsbeginwithanexclamationpoint(!)oradollarsign($).

CH12-CONCLUSIONSBynowtheneedforinclusionofbreadthinyouranalysisshouldbeobvious.Eachbreadthindicatorseemstohaveitsbenefitsanditsshortcomings.Thefactthatbreadthmeasuresthemarketsinamannernotpossiblewithpriceisthekeyelementintheseconclusions.Breadthmeasuresthemovementofthemarket,itsaccelerationanddeceleration.ItisnotcontrolledbyGeneralElectric,Microsoft,Intel,Cisco,GeneralMotors,etc.;anymorethanitiscontrolledbythesmallestcapitalizedstockontheexchange.

Table12-1showsthebreadthcomponentsneededforcalculationoftheindicator,whethertheindicatorisbetterforpickingmarketbottoms,markettops,trendanalysis,andwhetheritisbetterforshortorlongtermanalysis.Keepinmindthatshorttermisgenerallysomeperiodoftimelessthanfivetosixmonths.Identificationofamarketbottomcanbeaneventthatcanlastonlyafewdaysorlaunchagiantsecularbullmarket.Inthetablebelow,thetermsshortandlongtermrefertothefrequencyofsignalsasmuchasanything.Anumberofthelongtermindicatorsaregoodfortrendfollowing;inthetablebelowifneitherBottomsnorTopswaschecked,itwasbecausetheindicatorisbetterattrendanalysis.

SomeindicatorsarebetteratTops,Bottoms,andboth;andatdifferenttimes,butareonlyidentifiedbyBottomsand/orTopsbelow.Greateffortwasmadetodetermineifoneappearedtobebetteratoneortheother.Ifnodifferencecouldbeascertained,theywerereportedasbeinggoodforbothBottomsandTops.Pleasekeepinmindthenatureofmarketbottomsversusmarkettops.Bottomsaregenerallysharpandquickandusuallymucheasiertoidentify,whereasmarkettopsareusuallylongperiodsofdistributionwheremostmarketindicesrotatethroughtheirpeaksatdifferenttimes.YouwillnoticethatconsiderablymoreindicatorsarenotedasbeinggoodatBottomsthanatTops.Addtothatthesubjectiveinterpretationofthevariousindicatorsandthetablebelowshouldbeviewedasabeginningguideonly.

TableColumnsAAdvancesDDeclinesUUnchangedTITotalIssuesUVUpVolume

DVDownVolumeHNewHighsLNewLowsVTotalVolumeMKTMarketIndexTable12-1

Note:IfneitherBottomsnorTopsarechecked(X),itmeanstheindicatorisbetterattrendanalysis.

FavoriteBreadthIndicatorsHereisalistofbreadthindicatorsthatIbelievearegoodonestofollow.Somearefordailyanalysisandsomeareusedmerelytobekeptawareoftheirindications.Therearesomereallygoodbreadthindicatorsthathavemadesomeverygoodmarketcallsovertheyears–theyaremarkedasawarenessonlybelow.Itrytoavoidnoisyindicatorsthatrequiretoomuchinterpretationandveryshortterminnature.

Itisinterestingtonotethatonlyoneofmychoicesisabreadthindicatorthatutilizesupand/ordownvolumesolely.Ihavealwaysbelievedinthevalueofvolumeasitmovesthemarket,butquitepossiblythebreakdownofupanddownvolumedoesnotyieldanythingmoretothepicture.Itdoesappearthatupordownvolumeusedwithotherbreadthcomponentscanexaggerateorunderstatesomemarketaction,whichcancertainlyenhancethoseindicators.

McClellanSummationIndexforBigPictureoftheMarketIftherewasoneindicatorthatcoulddominantaninvestor’soverallconceptofthemarket,itwouldbetheMcClellanSummationIndex.Thisisnotsomuchforshorttermtiming,butisexcellenttoassesstheriskofparticipatinginthemarket.Table12-2showstheperformanceoftheRatioAdjustedMcClellanSummationIndexusingavarietyofthresholds(Parametercolumn).Thezeroparameterismostcommon,butIliketolookoneithersideofthat.Thedataisfrom1980through2012.

Table12-2

BreadthConsensusIndexIfoneweresoinclined,pickafewdozenbreadthindicators,ensuringthattheywerestructurallydifferenttoavoidtheMulticollinearity(seechapter2)trap,theneachdaykeeptrackastowhethertheyweregivingabullish,bearish,orneutralsignal.Thismightprovideyouwithagoodconsensusindicator,hopefullyonethatwouldalignitselfwiththemarketandnotonethatispsychological,asmostconsensusindicatorstendtobe.

IwentbackandlookedateachoftheindicatorsinTable12-1aboveandassignedbullish(+),bearish(-),andneutral(0)ratingsforallofthem.

Generally,anoverallbullishreadingwasregisteredbaseduponallthebreadthindicators.However,8ofthemweredecidedlynegativeandtherewerealmostasmanyneutralreadingsasbullishones.

Appendix A - Time Frames forAnalysisThefollowingtable(A-1)givesanumberofdifferenttimeframesthatcanbeusedwhenperformingmarketanalysis.Thisinformationisinvaluablewhenanalyzinganindicatororatradingsystem.Youmustknowhowsomethingwilldoinbothbullishmarketsandbearishmarkets.Manytimesyouwillfindsomethingthatworkswellinbullmarketsbutisentirelytooriskytouseallthetimebecauseitreallyfallsapartinbearishmoves.Whendevelopingandtestinganindicatorensureyouuseenoughdifferentdatasamplestoavoidcurvefitting.

MostoftheinformationinTableA-1isavailableontheinternetandinvestmentbooks.HerearesomeURLs(websiteaddresses)thatwillhelp.Keepinmindthatthesecanchangeandtheymustbetypedintoyourbrowser’saddresswindowaccurately.Googlesearchoffersanothergoodwaytofinddataontheinternet.

BusinessCycles-http://www.nber.org/cycles.html.

Appendix B - MiscellaneousInformationThisappendixcontainsmiscellaneousreferencesandsourceinformationthatIutilizeandbelievereliable.Thisissortofa“catchall”forthingsIbelieveshouldbehereplusthingsIhavelearnedovertheyearsandwishtoshare.

SelectedSmoothingConstants

Belowaresomecommonvaluesusedtosmoothdatausingexponential

averages:

Ifyouknowthenumberofdays(periods)thatyouwanttouse,justdivide2bythatnumberplus1.Forexample,ifyouwanted39days,2(39+1)=240=.05=5%.

BreadthDataSources

PinnacleDataCorp1016PlankRoadWebster,NY14580(800)724-4903pinnacle@netacc.netwww.pinnacledata.com

AuthorNote:Pinnacleisthedatasourceusedfortheanalysisandindicatorsinthisbook.StockCharts.comusesalotofPinnacleData.

RecommendedReadingonBreadth

TechnicalAnalysisfromAtoZbyStevenAchelisTheEncyclopediaofTechnicalMarketIndicatorsbyRobertColbyStockMarketLogicbyNormanFosbackWinningonWallStreetbyMartinZweig

TheResearchDrivenInvestorbyTimHayes(thisisoutofprint,butmaybeavailablethroughonlinestores)Andifyoureallyaren’tconvincedthattechnicalanalysisworks,trythisone:TheArtofLowRiskInvestingbyMichaelZahorchak(thisgreatbookisoutofprint–payanythingforit–itisgood)

Appendix C – ChartPacks fromStockCharts.comGregMorris’CompleteGuidetoMarketBreadthIndicatorsChartPack

Withthisupdatetomy“TheCompleteGuidetoMarketBreadthIndicators”bookusingStockCharts.com’ssymbolsandcharts,thisChartPackwilloffereverychartthatisinthebookupdatedeachdayfordailydataandeachweekfortheweeklyones.Whilethebookmighthighlightaparticulareventintime,likeOctober,1987,theChartPackwillgiveyouallofthedataup-to-date.Therearemorethan500chartsintheChartPack.Plus,andthisisbig,itwillcontainnotonlythechartsinthebookthatwerecreatedusingthebreadthdataandindicatorsfortheNewYorkStockExchange(NYSE),itincludesallofthesamechartsusingdatafromtheNASDAQexchangeandtheToronto(TSX)exchange.SothissingleChartPackcontainswellover500marketbreadthcharts.UPDATEDEACHDAY!Theadvantageofhaving“TheCompleteGuidetoMarketBreadthIndicators”isthedetailedexplanationsofallthechartsandsymbolsintheChartPack.Plus,withtheChartPackyouhaveaccesstoallofthebreadthdatainStockCharts.com’sSymbolCatalog.AlloftheStockCharts.comsymbolsinthebookarefortheNewYorkmarketandbeginwith!BINY.TheNASDAQsymbolsbeginwith!BINAandtheTorontoTSXsymbolsbeginwith!BITO.YoucanseeallofthedetailsonStockCharts.comatthefollowingURL:http://stockcharts.com/cgmbi-chartpack

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WindsorBooks,1991.Mamis,Justin.WhentoSell.NewYork:FarrarStrausGiroux,1977.McClellan,ShermanandMarian.PatternsforProfit.Lakewood,WA:McClellanFinancialPublications,Inc.,1976Merrill,ArthurA.BehaviorofPricesonWallStreet.AnalysisPress,1984.Murphy,JohnJ.TechnicalAnalysisoftheFinancialMarkets.NewYorkInstituteofFinance,1999.O’Neil,WilliamJ.,HowtoMakeMoneyinStocks.McGraw-Hill,1988.Pring,MartinJ.TechnicalAnalysisExplained.McGraw-Hill,1985.Pring,MartinJ.MartinPringonMarketMomentum,InternationalInstituteforEconomicResearchandProbusPublishing,1993.Stewart,JosephT.DynamicStockOptionsTrading.NewYork:JohnWileyandSons,1981.Teweles,RichardJ.TheCommoditiesFuturesGame,NewYork:McGraw-Hill,1974.Weinstein,Stan.SecretsforProfitinginBullandBearMarkets.DowJones-Irwin,Homewood,IL.,1988Zahorchak,MichaelG.TheArtofLowRiskInvesting.VanNostrandReinholdCompany,1977.Zweig,MartinE.WinningonWallStreet.NewYork:WarnerBooks,1986.

AbouttheAuthorGregoryL.Morriscurrentlyworksasaconsultantinthefieldoftechnicalanalysisandmoneymanagement.Greghasbeenatechnicalmarketanalysisforover40yearsandisenjoyingsemi-retiredlife.Greghasfinishedtheupdatingofhis“TheCompleteGuidetoMarketBreadthIndicators”book,writingablogforStockCharts.com,andplayinglotsofgolf.

RetiringinDecember,2014,GregwastheSr.VicePresident,ChiefTechnicalAnalyst,andChairmanoftheInvestmentCommitteeforStadionMoneyManagement,LLC.HestillservesasthechairmanoftheStationTrustBoard.Gregeducatesinstitutionalandindividualclientsonthemeritsoftechnicalanalysisandwhyheutilizesatechnicalrules-basedtrend-followingmodel.From2006to2014,Gregoversawthemanagementofover$5.5Billioninassetsinsixmutualfunds,separateaccounts,andretirementplans.FromDecember,2003toMay,2005,GregservedasaTrusteeandadvisortotheMurphyMorrisETFFund.HealsoservedasTreasurerandChiefExecutiveOfficerofMurphyMorrisMoneyManagementCo,theAdvisortotheFund.

GreghaswrittenthreebookswithMcGraw-Hill;“TheCompleteGuidetoMarketBreadthIndicators,”abookintroducingmarketbreadthanalysisforinvestors,athirdedition(originaleditionin1992)tohisbest-sellingandvastlyexpanded“CandlestickChartingExplained”wasreleasedinMarch,2006,and“CandlestickChartingExplainedWorkbook,”whichwaspublishedinDecember,2011.Gregrecentlycompletedhisfourthbook,“InvestingwiththeTrend–ARules-basedApproachtoMoneyManagement”publishedbyJohnWileyundertheBloombergPresslabel.Thisisabookabouttheflawsofmodernfinance,researchonriskandtrendanalysis,andhowtobuildarules-basedtrend-followingmodel.In2011,GregproducedJapaneseCandlestickPatternRecognitionsoftwareforMetaStock.Thisisanadd-onpackagethatnotonlyoffersautomaticidentificationofrealpatterns,butprovidesasophisticatedtrendanalysismeasureandautomaticsupportandresistanceidentification.

GregisamemberoftheNationalAssociationofActiveInvestmentManagers(NAAIM)wherehecurrentlychairstheWagnerPaperContest,theAmericanAssociationofProfessionalTechnicalAnalysts(AAPTA),andtheMarketTechnician’sAssociation(MTA).DuringcollegehewasamemberoftheAmericanInstituteofAeronauticsandAstronautics.

From1996to2002,GregwasCEOofMurphyMorris.Inc.,theleadingproviderofweb-basedmarketanalysistools,education,andcommentary.MurphyMorris,Inc.wasacquiredbyStockCharts.com,Inc.inOctober,2002.In1999,GregandthreeassociatesstartedMurphyMorrisMoneyManagementCo.tomanageassetsforindividuals.ThisfocuswaslaterchangedtoaddressthefirmbecomingtheAdvisortotheMurphyMorrisETFFundinJanuary,2004,andlatermergedintotheStadion(PMFM)familyoffunds.

From1994to1996,hewasPresidentofG.MorrisCorporation,aDallas,Texasheadquarteredbusinessthatprovidedproductsandservicesforinvestorsandtraders.Hisleadproductwasaseriesofover450Indicators&TradingSystemsthatsupportedmostwindows-basedtechnicalanalysissoftwarepackages.From1993to1994,GregwaspartofMarketArts,Inc.whichlaunchedthefirstwindows-basedtechnicalanalysissoftwareprogram,WindowsonWallStreet.

In1992hepublishedabookonJapanesecandlestickanalysiscalledCandlePower,nowavailableinsoftcoverasCandlestickChartingExplained(McGraw-Hill).Widelyrecognizedasanexpertoncandlesticksandthedeveloperofcandlestickfiltering,hehaslecturedaroundtheworldonthesubject.From1982until1993,heworkedinassociationwithN-SquaredComputing,producingover15technicalanalysisandchartingsoftwaretitles,manyofwhichareactivelyusedtoday.InMay,1989,hewasawardedoutstandingalumnifor1989fromPrattCountyCollege.

Gregearnedhispilot’slicensein1967andflewmanyversionsofCessna(Cessna150maximumtakeoffweight=1,500pounds)andMooneysingle-engineaircraft.Duringhis7yearsasaNavypilotheflewtheT2-CBuckeye,A-4JSkyhawk,andhisfavoritemilitaryjet,theF-4JPhantom.WhileintheNavy,heloggedover240carrierlandings(103atnight)andexceededtwicethespeedofsound.From1978tohisretirementin2004,GregwasaCaptainforDeltaAirLinesflyingtheBoeing727,LockheedL-1011,McDonaldDouglasMD-88,MD-90,Boeing757,Boeing767,andhisfavoriteairliner,theMcDonaldDouglasMD-11(maximumtakeoffweight=625,000pounds).Withhisprivatepilottime,theNavyfighterpilotcareer(1971–1978),andairlinecareerheaccumulated21,000hoursofflyingtime,andashelikestosay,neverputascratchonanairplane.

HegraduatedfromtheUniversityofTexasatAustinin1971,hasaBSdegreeinAerospaceEngineering,hasauthorednumerousinvestment-relatedarticles,speaksatnumerousseminarsandinvestmentgroups,appearedmanytimeson

FinancialNewsNetwork(FNN),FoxBusiness,CNBC,andBloombergTV.GregwasfeaturedinInvestor’sBusinessDailyinDecember,2007,BusinessWeekinJuly2008,Barron’sinJanuary,2009,StocksandCommoditiesinSeptember,2009,andBloombergMarketsinMay,2011.GreghasbeeninvitedtoItaly,Brazil,Vietnam,Canada,HongKong,Singapore,andChinatolectureonthemeritsoftechnicalmarketanalysis.From1971to1977,hewasaNavyF-4fighterpilotaboardUSSIndependencewhowasselectedfor,andgraduatedfrom,theNavyFighterWeaponsSchoolknownasTopGun.Gregandhiswife,Laura,liveinthemountainsofNorthGeorgia.

GregcurrentlywritesablogonStockCharts.comcalledDancingwiththeTrend.Thegoalisnottoanalyzethecurrentmarketbuttoshareexperiencesandlessonsafteroverfortyyearsasatechnicalanalyst.Alargenumberofaudiointerviewsareavailablehere:GregMorris

PraiseforTheCompleteGuidetoMarketBreadthIndicators

“ThisbookshouldbecalledtheEncyclopediaofMarketBreadthIndicatorsbecauseitincludeseveryformormarketbreadthknowntoman.Amustforanyseriousstudentofthisimportantandoverlookedsubject.”MartinPring,Author,TechnicalAnalysisExplained

“InTheCompleteGuidetoMarketBreadthIndicators,GregMorrispassesalonghismanyyearsofexperience,describingthemarketbreadthindicatorsthathefindsmosteffective.”ShermanMcClellan,Publisher,TheMcClellanMarketReport

“ThemostcomprehensivestudyofbreadthI’veeverseen.Here,inoneplace,yougetliterally,alltheindicatorsthatstudythemarketsinnards.Allserioustechnicianswillwantthisbookontheirshelves.”JohnSweeney,FormerTechnicalEditor,TechnicalAnalysisofStocksandCommodities

“Thisisclearlythedefinitiveworkonbreadth.Frombasictoadvancedapplications,GregMorrishasincludeditallinthisbook–includingthoughtsonthecontinuingvalidityofthedata.”LarryMcMillan,Author,OptionsasaStrategicInvestment,McMillanonOptions,andProfitwithOptions

“Rickindetailyeteasytodigestandunderstand.GregMorrishasleftnostoneunturnedinwritingwhatisclearlytheleadingsourceonstockmarketbreadth.”TimHayes,CMT,ChiefInvestmentStrategist,NedDavisResearch

“GregMorrishasdoneagreatjobofassemblingalargevarietyofindicators

basedonmarketbreadthdata.Moreimportantly,hehasillustratedwhybreadthdataissoimportanttomarketanalysis.”TomMcClellan,Editor,TheMcClellanMarketReport