Saturday, 6 October 2018

Advancing vs. Declining stocks

What can we learn from the numbers of advancing vs. declining stocks?

Since 1900 up to today stats on the Dow:
  • The median up day is +0.51%
  • The median down day is -0.50%
  • But the Dow is up 39,500% over this time.
Looking at these figures, one would say: "how's it possible, reaching 39,500% with these small daily increments?  Well it's like eating an elephant, bite by bite.

With only two numbers at the end of the day, for example 8 advancing and 32 declining stocks from the JSE Top 40 index, J200. We can mathematical play around and get to interesting conclusions.  With the difference off -24 on the Spread or 0.25% Ratio, you can probably say this does not make any sense. Presenting the data graphical sketch a different picture.
Advance/Decline Line
The advance/decline is measuring market breadth, which answers the question, "how broad is the rally?"  The AD-Line can be used alone or together with the price chart to look for divergences. A divergence suggests that a move in the price chart is unsupported by the broad market, and it should, therefore, be taken as a warning of an impending turning point in the index or market.  A traditional technical indicator, such as a moving average or a stochastic oscillator, can be applied to the chart or used to smooth the signals it gives.
A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Yesterday\'s A/D Line Value
Using the AD-Line graph next to the J200 and applying the RSI oscillator, looks as follows:

At the left-top, the AD-Line graph has formed a bullish flag. Though the price line has broken the flag and the support line for a 65% retracement.

The RSI indicator at the left-bottom displays oversold for a while and suggests time to turnaround.
Comparing the AD-Line with the J200 index.  At the right-top graph, we noticed that the index has broken the support trend line, as it completed the bearish flag.  This graph looks very bearish, but relief might be on the horizon. At least for the short term.

The RSI on the index also displays oversold conditions and confirmed the down fall.

Advance/Decline Spread
A variation on the A/D line is the A/D spread. Just as its name implies, the A/D spread charts the difference between the number of advancing stocks and declining stocks in a given market on a given day.

Advance/Decline Ratio
Another variation on the A/D spread is the advance/decline ratio, which divides the advancers by the decliners.

These two graphs are oscillators of the Advancing and Declining stocks within the J200 index.  The AD Spread is defined by subtraction and the AD Ratio by division.

Both of these oscillators have turned from the oversold level.

Absolute Breadth Index
The absolute breadth index is a measure of internal volatility. It calculates the absolute value of the difference between the number of advancing and declining stocks.

The chart is a representation of the volatility in the spread between advancers and decliners.  Above the horizontal line, stocks are trending and below the level, range bound. Currently we noticed that the bearish trend has been confirmed by this indicator, crossing the horizontal line.

Breadth Thrust
Breadth thrust is an internal indicator. It is a ratio of moving averages that creates an excellent judge of market momentum.

Breadth thrust can be read just like a stochastic or RSI, where overbought and oversold levels are at the extremes. Divergence with the underlying price chart points to weakening momentum.

Arms Index (TRIN)
Developed by Richard Arms, TRIN is a double-ratio that divides the A/D ratio by the A/D volume ratio.  I've adapted the formula by multiplying volume and price. This is to calculate a weighted TRIN.

Both the TRIN graphs have turned bearish, but need confirmation.
A value of less than 0.51 means advancing stocks are getting more than their share of volume, which is bullish for the market. When the value of TRIN is more than 0.51, declining shares are taking an outsized amount of volume, which is bearish for the market.

Note that the TRIN was smoothed with a 10 day moving average and a 3 standard deviation is used to set the pivot. The graph was reversed. Above the line is bullish and below bearish.

Playing around with the data and information, all add up to a picture and feeling for the market.

Trade with caution as the markets are very unstable and uncertain.
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