Friday, April 18, 2008

Morning Breadth

Tonight…some indicator analysis. I think many times traders focus too much on pattern recognition and therefore only look at price. This is especially true of intraday traders. Looking at price and price-based indicators is like looking at the Grand Canyon on a black and white TV. You can see it, but throw in volume and maybe you’ll get some color. Breadth could get you HD. Sentiment gives you surround sound. Add some intermarket analysis like Dr. Steenbarger employs and some historical studies like I prefer and you might actually get to view it for real. Tonight I’m going to look at breadth.

Many traders look at breadth measures like the Advance/Decline line or the McClellan Oscillator on an end-of-day basis. But let’s examine whether intraday breadth analysis can lend some value.

I ran a test back to April of 2001 looking at 15 minute bars in the SPY, the NYSE Advancing Issues and the NYSE Declining Issues. I wanted to see if strong or weak breadth in the morning led to price strength or weakness throughout the rest of the day. The rules for this test were fairly simple.

If advancers led decliners by 4-1 at 9:45, then I would buy the SPY and sell it at 4pm.

If decliners led advancers by 4-1 at 9:45 then I would short the SPY and cover it at 4pm.

Results:

4-1 Advancers:
Trades: 33
Winners: 17
Losers: 16
Avg Win: 0.8%
Avg Loss: 0.5%
Avg Trade: 0.2%
Profit Factor: 1.72

4-1 Decliners:
Trades: 36
Winners: 23
Losers: 13
Avg Win: 1.0%
Avg Loss: 1.3%
Avg Trade: 0.2%
Profit Factor: 1.36

In general, strong advance/decline numbers in the early morning show a mildly positive expectancy in the SPY for the rest of the day while weak a/d numbers show a mildly negative expectancy for the rest of the day.

Traders may benefit from tracking early morning breadth statistics. While this is certainly not something you would want to trade on its own, it may help to confirm or filter trades you are considering. Using breadth in conjunction with price and other kinds of analysis can make for a potent combination.
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For those who would like to explore this concept more it is available for purchase and download in Tradestation format here. The study comes with flexible inputs to adjust times and breadth requirements. A pre-set workspace is also included.

3 comments:

Red Hue said...

Rob,

I have played with the idea of intraday breadth quite a bit...I seem to recall a "system" in my files somewhere that worked well but was infrequent...it was something like watching for a switch in breadth around mid morning...for example decliners over advancers 2:1 early...go long when there is a switch after the hourly range and advancers suddenly swamp decliners 2:1...

Rob Hanna said...

Red -

Very interesting. Sounds like it would be worth playing around with. Thanks for sharing.

Rob

Eyal said...

Hi Rob,

This is interesting material. I was wondering why you chose the ratio of 4 to 1, have you looked at values around it like 2/3/5 to 1 and then saw the most correlation between 4-1 and end of day results?

Thanks,
Eyal