Assessing Market Action With Indicators And History
Tuesday, July 8, 2008
Another Breadth Indicator Hitting Extremes
One breadth indicator I like to watch is provided by Worden Bros. It measures the % of Stocks that are trading at least 2 standard deviations below their 40-day moving average (T2116). Rather than looking at stocks that are simply in a downtrend like the “% of stocks below the 40-day MA”, it looks for extreme readings. Of all the commercially available breadth indicators out there, this one most closely represents the spirit of the CBI. While the criteria are less stringent, it is still looking for somewhat extreme conditions to measure. Today T2116 hit a new high of 58.1%. The indicator dates back to 1986. I looked back to find all days that had readings higher than today’s. It was a short list: 7/23/02, 9/20 & 9/21/01, 8/31/98, and lastly 10/19/87 (Black Monday) through 10/28/87. That’s it. If you take a look at those dates you’ll find they were very opportune times to buy.
Of course breadth has been suggesting a reversal for a while now…
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In this blog I will be examining market action and quantifying my findings. Using sentiment, breadth, price and volume indicators - both standard and customized - I will try and uncover short-term edges which could be taken advantage of by market participants. I will frequently add opinion to these studies and may sometimes post opinions without quantifiable research behind them.
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I have traded professionally since 2001. From January 2003 through February 2007 my bi-weekly column "Rob Hanna's Putting It All Together" appeared on TradingMarkets.com. I have been conducting quantitative research and designing trading systems - mostly focused on short-term edges since 2004.