powerpoint 6: Measuring Market Strength

Question 1

Divergence Analysis

Answer 1

When oscillator/indicator peaks/bottoms fail to confirm price peaks and bottoms

Question 2

the most successful method over the past 50 years of warning of a major market top

Answer 2

negative divergences

Question 3

Best way to measure internal strength of the market index

Answer 3

Advance – Decline (Breadth) Line

Question 4

The cumulative sum of advancing issues minus declining ones

Answer 4

Advance – Decline (Breadth) Line

Question 5

for what can Advance – Decline (Breadth) Line be constructed for?

Answer 5

Can be constructed for any index, industry group, exchange, or basket of stocks

Question 6

how is Advance – Decline (Breadth) Line calculated

Answer 6

Calculated daily, weekly or any period

Question 7

to what is Advance – Decline (Breadth) Line not applicable?

Answer 7

not applicable to commodities

Question 8

why should the Breadth line follow and move to new highs and lows with the stock market index, (i.e like Dow Theory averages confirming each other)?

Answer 8

if not, there is a divergence, which will lead to a price reversal

Question 9

Breadth Differences

Answer 9

Net advances-declines, with –ve or absolute value

Not useful

Question 10

why are Breadth Differences useless?

Answer 10

because parameters must be adjusted for increase in issues traded

Question 11

McClennan Oscillator

Answer 11

The difference of 2 exponential moving averages (19 & 39 day EMAs) of advances – declines

In the intermediate term, shorter term shorter moving averages rise faster than longer term ones

Question 12

McClennan Oscillator

when is a security overbought?

Answer 12

+100 to +150

Question 13

McClennan Oscillator

when is a security overbought?

Answer 13

-100 to -150

Question 14

McClennan Oscillator

what should we look for when trying to find divergences

Answer 14

a market rise with lower top in MCO is suspect. Opposite true at bottoms

Question 15

McClennan Oscillator

what does the first overbought level indicate?

Answer 15

intermediate term rise higher, not a top

Question 16

McClennan Summation Index

Answer 16

Measure of the area under the McClennan Oscillator curve by accumulating the daily McClennan Oscillator figures into a cumulative index

Oscillates between 0 and 2000, neutral is 1000

Question 17

Ratio adjusted Summation Index (RASI)

Answer 17

used to factor for increases in number of issues, and oscillated between +500 (overbought) and -500 (oversold)

Question 18

Breadth Thrust

inventor

Answer 18

Martin Zweig

Question 19

the most common indicator

Answer 19

Breadth Thrust

Question 20

how does the Breadth Thrust work?

Answer 20

calculating a 10 day SMA of advances divided between the sum of advances and declines when the indicator crosses zero and goes above 0.61

–> The technician must frequently review the accuracy of these parameters

Question 21

Arms Index

inventor

Answer 21

Created by Richard Arms Jr

Question 22

how does the Arms Index work?

Answer 22

Measures relative volume in advancing stocks versus declining stocks

Large volume in declining stocks, market likely at a bottom

Large volume in advancing stocks, market is healthy

Question 23

Arms Index

formula

Answer 23

(advances / declines) / (advancing volume / declining volume)

Question 24

90% Downside Days (NPDD)

inventor

Answer 24

Paul Desmond

Question 25

90% Downside Days (NPDD)

purpose

Answer 25

Reliable way to identify major market bottoms

Question 26

when do 90% Downside Days (NPDD) occur?

Answer 26

Occurs when on a particular day the % of downside volume > total of upside and downside volume by 90%

the percentage of downside points exceeds the total of gained points and lost points by 90%

Question 27

when does a 90% upside day occur?

Answer 27

when both the upside volume and points gained are 90% of their respective totals

Question 28

90% Downside Days (NPDD)

findings

Answer 28

A NPDD in isolation is a warning of potential danger ahead suggesting investors are in a mood to panic

A NPDD after a new market high is just a correction

When 2 or more NDDD occur, additional NPDDs occur, often 30 days or more apart

Big volume rally periods of 2 – 7 days often follow a NPDD and can be profitable for agile traders

A major reversal is signaled when a NPDD is followed by a 90% upside day (NPUD) or two back to back 80% upside days (within 5 trading days from the low) The longer it tales for the NPUD, the more skeptical you should be

Be careful when only one of 2 NPUD reaches 90%.

–>Such rallies are usually short of what is needed

Back to back NPUD are rare and long term bullish

Question 29

Hindenburg Omen (HO)

purpose

Answer 29

Signals a reversal downward and potential crash in the market just like the Hindenburg blimp crash

Has a very good track record, always occurred before a major crash, but some false signals too