How to use market breadth to avoid market crashes
As you can see the breadth peaked in early November 2010. Since then rallies have been on lower breadth. Each successful bounce effort after that was not followed by significant breadth. This breadth divergence was clearly a sign of topping pattern.
Now breadth is at extreme negative level. Historically such low levels lead to tradable bounce in next 1 to 6 weeks time frame. Often such low readings also lead to new bull move.
If you see the left side of the above chart you will see that during the flash crash in June to August 2010 period the readings went below 200 to 130 , that resulted in a big rally starting September 2010. Readings below 200 indicate seller capitulation.
A detailed understanding of market breadth and how to use it can help you develop very effective market timing tools that will keep you out of bearish phases and will tell you when major rally is likely to develop. It is one time effort but it will save you hundreds of thousands and make you millions.
The Market Monitor is a breadth based risk management and market timing tool that I have been using for last 10 years. It has kept me out of every risky and bearish period.
Now the tool is used by number of trading bloggers (if you do search for Stockbee Market Monitor you will see lot of them using this tool ) you and many of them have done further refinement to the concept.
As I get many email messages from this blog readers about Market Monitor and how to interpret it the following Market Monitor post details the use of the tool and how to set it up in Telechart.
stockbee Market Monitor is a market timing tool. It looks at the underlying breadth of big moves to determine market direction. The objective of Stockbee Market Monitor is to identify and anticipate market turns quickly and proactively. stockbee Market Monitor indicates bearish or bullish turns zones ahead of the actual turn. It is a overall filter for deciding when to use breakout methods, when to be aggressive in terms of margin and risk, and when to be defensive. I also use Market Monitor to time retirement account funds allocation.
Market Monitor has kept me out of every bearish move since 2002 and has helped me get in to every bullish move right at its beginning and get out before actual top.
Stockbee Market Monitor= Market Breadth of major moves+extreme zones+divergences+breadth thrust
What is market breadth
Market Breadth simply tells you how many stocks are going up, how many going down, and how many are unchanged. Market breadth tells you how many stocks are participating in the move. Market breadth uses market derived data to judge the health of a move.
There are variations of the basic breadth idea like measuring number of new highs and new lows, or measuring the up volume and down volume. But ultimately all breadth indicators mathematically are derivatives of :
Different people have massaged this data in various ways by using variety of mathematical techniques like moving average, exponential moving average, ratio analysis, standard deviation and so on to develop number of breadth based indicators.
Because it is internally driven information, it tells you objectively the participation of stocks in a market move. Sometime one of the indexes can be positive as the index are calculated by price weightage or capitalisation weight age, but breadth does not lie. Breadth treats all issues equal.
So because Dow Jones is price weighted , if say the 10 highest priced stocks are up big , it can be positive, even if remaining 20 stocks are down for the day. In such a case the breadth will tell you real story. The breadth will be 10/20.
Breadth tells you immediately the strength and direction of a move in the market. A market in which more stocks are going up compared to going down and more stocks making new high compared to new low is a good bull market. Extreme breadth is often indicator of exhaustion and such zones lead to reversal. Tops and bottoms are also formed due to breadth divergence. If a move keeps going up but breadth does not increase then that is divergence. Such divergences typically result in failure of the move.
Primarily breadth is calculated by tracking advance decline and/ or new high new low and/or advancing volume and declining volume.
- Total stocks available for trading in the market (T)
- Advancing stocks or advances (A)
- Declining stocks or decliners (D)
- Unchanged (U)
- Advancing Volume or Up volume (UV)= total volume of (A)
- Declining volume or Down volume (DV)= total volume of (D)
- Total volume = total of all volume traded for the day for all stocks
- New high (h)= number of stocks making 52 week high
- New Low (l)= number of stocks making 52 week low
How is Stockbee Market Monitor different from other market breadth indicator
stockbee Market Monitor is different from most commonly used breadth indicator. It only looks at breadth of major moves. Stockbee Market Monitor uses minimum liquidity to calculate breadth. All market breadth indicators take any up or down move to calculate breadth. So if a stock goes up on 100 share volume it is still calculated . In stockbee Market Monitor such stocks are not used for market calculations. Only stock with Dollar volume above 250000 USD or 100000 shares traded are used in all stockbee Market Monitor calculation. stockbee Market Monitor uses price cut offs to eliminate low priced stocks. Fourth difference in use of only Common Stocks to calculate breadth. This ensures you are looking at breadth of only tradable stocks.
These changes in ways to calculate market breadth significantly improves the breadth indicators.
Market monitor looks at breadth of significant moves in the market instead of small moves. By doing that it reduces the noise in breadth data. Say if you use just advancing , declining, and unchanged issues to look at breadth on a daily basis, a stock going up or down 1 cent also gets represented in the data.
Same way if you use up volume and down volume , even a stock trading single share more than yesterday gets reflected in the data. That makes breadth data very noisy. So if you look at breadth chart they tend to be very noisy.
So stockbee Market Monitor uses only certain magnitude moves for calculating breadth.
- Daily time frame=4% plus
- Monthly move=25% plus
- Monthly move=50% plus
- Quarterly move= 25% plus
By using such big moves to measure breadth you are reducing the noise in data.
Stockbee Market Monitor measures breadth on various time frame. That allows you to create slow and fast indicators or strategic or tactical indicators. So market monitor measures the breadth of the market on various time frames.
There is also a variation in how the % moves are calculated. In some cases the reference point for percent change is price number of days ago. In some cases it is lowest price for the period of calculation. The logic is to track both kinds of trends. Some trends start from low points. some start from mid way point. So if you use just new high or new low it can be misleading. This is very critical at turns where up or down moves start from 52 week high or low.
One of the problems with many breadth indicators is that they are 2nd or 3rd derivatives of breadth. This creates a lag in these indicators. The stockbee Market Monitor uses 1st derivative data to eliminate such problems.
Market Monitor Scans
To get stockbee Market Monitor Daily data you need to setup following scans in Telechart. All stockbee Market Monitor scans use Common Stock as stock universe.
4% plus daily
Number of stocks up 4% for the day on high volume.
(100 * (C – C1) / C1) >= 4 AND V >= 1000 AND V > V1
4% down daily
Number of stocks down 4% plus in a day on high volume.
( 100 * (C – C1) / C1) <= ( – 4) AND V >= 1000 AND V > V1
25% plus Quarter
Number of stocks up 25% plus in a quarter
100 * ((C + .01) – ( MINC65 + .01)) / (MINC65 + .01) >= 25 and AVGC20 * AVGV20 >= 2500
Number of stocks down 25% plus in a quarter.
(100 * ((C + .01) – (MAXC65 + .01)) / (MAXC65 + .01)) <= ( – 25) and AVGC20 * AVGV20 >= 2500
25% plus month
Number of stocks up 25% plus in a month
C20 >= 5 AND (AVGC20 * AVGV20) >= 2500 AND 100 * (C – C20) / C20 >= 25
25% down month
Number of stocks down 25% plus in a month
C20 >= 5 AND (AVGC20 * AVGV20) >= 2500 AND 100 * (C – C20) / C20 <= ( – 25)
50% plus month
Number of stocks up 50% plus in a month
C20 >= 5 AND (AVGC20 * AVGV20) >= 2500 AND 100 * (C – C20) / C20 >= 50
50% down month
Number of stocks down 50% plus in a month.
C20 >= 5 AND (AVGC20 * AVGV20) >= 2500 AND 100 * (C – C20) / C20 <= ( – 50)
34/13 Bull
Number of stocks up 13% in 34 days.
100 * ((C + .01) – ( MINC34 + .01)) / (MINC34 + .01) >= 13 and AVGC20 * AVGV20 >= 2500
34/13 Bear
Number of stocks down 13% in 34 days.
(100 * ((C + .01) – (MAXC34 + .01)) / (MAXC34 + .01)) <= ( – 13) and AVGC20 * AVGV20 >= 2500
10 Day Ratio
This is not calculated using Telechart. This is calculated by using last 10 days of 4% plus and down breakouts.
10 day breadth ratio= number of 4% plus daily breakouts in 10 days/number of 4% down daily in last 10 days.
34/13D
This is not calculated using Telechart. This is calculated using the 34/13bull and 34/13 bear data
34/13D= 34/13bull-34/13bear
Total (No ETF)
This is the number of “Common Stocks” from Telechart component lists.
How to interpret Market Monitor
4% plus Daily
up to 300 normal buying pressure
4% Down daily
up to 300 normal selling pressure
10 Day cumulative breadth ratio
When market is in bearish phase first time ratio is 2 plus signals start of a bull move.
25% plus quarter
This is a primary indicator
Market is in bullish phase: 25% plus quarter > 25% down quarter.
25% down quarter
This is a primary indicator
Market is in bullish phase: 25% plus quarter>25% down quarter.
25% plus month and 25% down month
These are secondary indicator.
50% plus month and 50% down month
This is a secondary indicator.
This indicator tells you intermediate term extreme bullish phases and likely pullback/correction points
Readings on 50% plus month above 20 are bearish.
34/13 bull and 34/13 bear
34/13 is a faster version of 25% plus or down in a quarter.
34/13 bull looks for half of that move in half the time frame.
Source:
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