NYSE UP ISSUES RATIO

Click here for chart

APPLICABLE TIME FRAME(S):  

SHORT / INTERMEDIATE

UPDATE SCHEDULE:

Each weekday night by 7:00 PM EST

EXPLANATION:

This is the 10-day moving average of the NYSE Advance/Decline line.  It is expressed as the number of issues traded on the New York Stock Exchange which are up on the day as a percentage of the total.  For example, on any given day, if there were 1500 issues which closed higher and 600 which closed lower, then the advancing percentage would be:

1500 / (1500 + 600) = 1500 / 2100 = 71%

This calculation ignores issues which ended unchanged on the day.  The ratio is observed on a 10-day moving average basis in order to smooth out extreme day-to-day fluctuations and focus on the most recent two-week period.

GUIDELINES:

This indicator can be effectively used to approximate overbought / oversold conditions.  When the ratio reaches one of the extremes, caution is warranted when trading with the current trend.  For example, if the trend is up and the A/D ratio reaches .60, then there is a high probability of at least a short-term retracement. 

Overbought/oversold indicators such as this one are most effective when giving contra-trend signals.  When we are in a clear long-term downtrend and this indicator becomes overbought, then it is an effective sell signal.  Conversely, if we are in a sustained uptrend and the indicator becomes oversold, then it suggests that an upside reversal may be forthcoming.

The chart below shows two occurrences in 2002 where breadth extremes gave us a hint that a trend change may about to take place.  When price kept falling despite the up issues ratio falling more than one standard deviation from its mean, it told us that the market was extremely weak and vulnerable to further price declines. 

By the time the ratio approached its third standard deviation - an extremely rare occurrence, traders had had enough and the market put in a solid low.  However, the explosive rally into August brought breadth well into overbought territory, and in the context of the long-term downtrend we were in, that's all it took to get traders back to aggressively selling the market.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the Down Pressure indicator reaches overbought, or troughs immediately after the indicator reaches 70%.  It is a guideline and not a trading system unto itself.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between .44 and .56

95% of readings (2 standard deviations) should be between .38 and .62

99% of readings (3 standard deviations) should be between .32 and .68

In other words, we should expect a reading under .32 or over .68 only between 2-3 times per year.  Since such a reading would be highly unusual, it suggests that we are seeing an unsustainable trend.  These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

New York Stock Exchange (www.nyse.com)

© 2005  Sundial Capital Research, Inc.  All Rights Reserved.