Using market breadth indicators
(StockCharts.com has changed the way it displays the scale of the charts, which are ratios of two symbols, forcing me to change the placement of the horizontal lines on the last chart. So, I am re-posing this article and using the opportunity to make a few other cosmetic changes in it - like the color of the horizontal lines.)
Again, let's start with a 3-year chart of QQQ for comparison pusposes:
1) Using NASDAQ's Number of New 52-Week Lows:
When this indicator spikes above the 500 level, this tends to indicate an intermediate-term bottom. It is not very good for picking tops.
2) Using NASDAQ's Number of New 52-Week Highs:
Excluding the mania months of early 2000, when this indicator rises above 200, it usually warns about an impedding intermediate-term top. Respectively, when it falls below 10, this usually portends that an intermediate-term bottom is imminent.
3) Using NASDAQ's Ratio of New 52-Week Highs / New 52-Week Lows:
When this indicator drops below 0.02, this tends to indicate an intermediate-term bottom. When it rises above 5, this tends to warn about an impedding top - although this indicator is not very precise for picking the exact moment of the top.
4) Using NASDAQ's Net New 52-Week Highs:
When this indicator spikes below -500, this tends to indicate an intermediate-term bottom. When it rises above 123, this tends to warn about an impedding intermediate-term top - although it is not very precise for picking the exact moment of the top and it can go significantly higher than 120 (and has done so, during the mania months of early 2000).
5) Using NASDAQ's Record High Percent Index:
When this indicator rises above 0.75, it indicates a severely overbought condition and an impedding intermediate-term top. Similarly, when it falls below 0.15, it indicates a severely oversold condition and an impedding intermediate-term bottom. Note, however, that the actual top or bottom might take several weeks to form. It is better to trade this indicator by smoothing it with a 20-day EMA and buy when this EMA crosses the lower horizontal line from below and sell when it crosses the higher horizontal line from above.
6) Using the NYSE Up Volumt / Down Volume Ratio:
According to Paul Desmond, president of Lowry's Reports, Inc. (http://www.lowrysreports.com/dow.shtml ), the end of a major bear market is marked by one or more "90% Down days", followed, within 16 days, either by a "90% Up day", or by two back-to-back "80% Up days". A "90% Down day" is defined as a trading day on which the down volume on the NYSE is 90% (or more) of the total volume and the total number of points lost on all issues traded on the NYSE on that day is 90% (or more) of the total sum of all points gained and lost on that day on the NYSE. Similarly, a 90% Up day is a trading day on which the up volume on the NYSE is 90% (or more) of all volume and the total number of points gained is 90% (or more) of the sum of all points gained and lost in all issues trading on the NYSE on that day.
Unfortunately, I have no easy way of determining the ratio of "points gained and points lost" (besides, what about issues like BRK.A that move by a huge number of points every day?). The above chart is a crude way of approximating this signal by watching only the ratio between the up volume and the down volume on the NYSE. When the indicator drops below the lower horizontal line, the down volume outnumbers the up volume by 9:1 or better. Similarly, when the indicator rises above the uppter horizontal line, the up volume outnumbers down volume by 9:1 or better.
Note that, since this is not the original Desmond signal, it is dangerous to interpret it in the same way as the original one. Nevertheless, a "90% Down Volume day", followed by a "90% Up Volume day" is a rare and remarkable event and can often spur very strong rallies, even when it doesn't mark the end of a bear market.
(BTW, all these charts are "live" - they are updated automatically as time passes. Whenever you wonder whether a top or a bottom might be near, you just need to re-read these articles and look at the charts in them.)
Regards,
Vesselin
(StockCharts.com has changed the way it displays the scale of the charts, which are ratios of two symbols, forcing me to change the placement of the horizontal lines on the last chart. So, I am re-posing this article and using the opportunity to make a few other cosmetic changes in it - like the color of the horizontal lines.)
Again, let's start with a 3-year chart of QQQ for comparison pusposes:
1) Using NASDAQ's Number of New 52-Week Lows:
When this indicator spikes above the 500 level, this tends to indicate an intermediate-term bottom. It is not very good for picking tops.
2) Using NASDAQ's Number of New 52-Week Highs:
Excluding the mania months of early 2000, when this indicator rises above 200, it usually warns about an impedding intermediate-term top. Respectively, when it falls below 10, this usually portends that an intermediate-term bottom is imminent.
3) Using NASDAQ's Ratio of New 52-Week Highs / New 52-Week Lows:
When this indicator drops below 0.02, this tends to indicate an intermediate-term bottom. When it rises above 5, this tends to warn about an impedding top - although this indicator is not very precise for picking the exact moment of the top.
4) Using NASDAQ's Net New 52-Week Highs:
When this indicator spikes below -500, this tends to indicate an intermediate-term bottom. When it rises above 123, this tends to warn about an impedding intermediate-term top - although it is not very precise for picking the exact moment of the top and it can go significantly higher than 120 (and has done so, during the mania months of early 2000).
5) Using NASDAQ's Record High Percent Index:
When this indicator rises above 0.75, it indicates a severely overbought condition and an impedding intermediate-term top. Similarly, when it falls below 0.15, it indicates a severely oversold condition and an impedding intermediate-term bottom. Note, however, that the actual top or bottom might take several weeks to form. It is better to trade this indicator by smoothing it with a 20-day EMA and buy when this EMA crosses the lower horizontal line from below and sell when it crosses the higher horizontal line from above.
6) Using the NYSE Up Volumt / Down Volume Ratio:
According to Paul Desmond, president of Lowry's Reports, Inc. (http://www.lowrysreports.com/dow.shtml ), the end of a major bear market is marked by one or more "90% Down days", followed, within 16 days, either by a "90% Up day", or by two back-to-back "80% Up days". A "90% Down day" is defined as a trading day on which the down volume on the NYSE is 90% (or more) of the total volume and the total number of points lost on all issues traded on the NYSE on that day is 90% (or more) of the total sum of all points gained and lost on that day on the NYSE. Similarly, a 90% Up day is a trading day on which the up volume on the NYSE is 90% (or more) of all volume and the total number of points gained is 90% (or more) of the sum of all points gained and lost in all issues trading on the NYSE on that day.
Unfortunately, I have no easy way of determining the ratio of "points gained and points lost" (besides, what about issues like BRK.A that move by a huge number of points every day?). The above chart is a crude way of approximating this signal by watching only the ratio between the up volume and the down volume on the NYSE. When the indicator drops below the lower horizontal line, the down volume outnumbers the up volume by 9:1 or better. Similarly, when the indicator rises above the uppter horizontal line, the up volume outnumbers down volume by 9:1 or better.
Note that, since this is not the original Desmond signal, it is dangerous to interpret it in the same way as the original one. Nevertheless, a "90% Down Volume day", followed by a "90% Up Volume day" is a rare and remarkable event and can often spur very strong rallies, even when it doesn't mark the end of a bear market.
(BTW, all these charts are "live" - they are updated automatically as time passes. Whenever you wonder whether a top or a bottom might be near, you just need to re-read these articles and look at the charts in them.)
Regards,
Vesselin
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