First, however, a quick review of basics: Market cycles typically stimulate down with a liftoff from lows on real rigid breadth too momentum. As the upward stage of the cycle matures, nosotros stimulate down to encounter increasing differentiation with stock sectors, with the strongest continuing higher too the weaker ones diverging. During this maturation, volumes tend to drib and, with them both volatility too correlation. During the to a greater extent than mature phases of a cycle, the intensity of buying pull per unit of measurement area wanes, but selling pull per unit of measurement area also remains low. It is when selling pull per unit of measurement area picks upwards that nosotros stimulate down an actual downwards stage to the cycle.
One of the ways I runway the cyberspace buying too selling activity inwards the stock marketplace is through the cumulative upticking vs. downticking of a broad diversity of shares. You tin give the sack intend of this equally an instantaneous advance-decline line, where every transaction across every stock is counted equally a purchase (uptick) or sell (downtick). When the cumulative business moves steadily higher, nosotros convey rigid cyberspace buying interest. When it flattens out, nosotros know that a greater residual of buying too selling is present.
Please authorities annotation that the chore of a trader is non to shill for the bull or comport side of the market. Rather, the trader's chore is to accurately assess what the marketplace is doing forthwith too conform to the surroundings that is presented. Grounding a see of the surroundings inwards a broad diversity of information is a agency of staying cognitively too emotionally grounded too avoiding, equally much equally possible, biases inwards one's desires for upward or downward movement. Some of the best tools for trading psychology are tools for accurate marketplace analysis.
The top 3 charts stand upwards for the cumulative upticking vs. downticking for all NYSE shares (top chart); all U.S. stocks traded on major too regional exchanges (second chart); too the Dow thirty stocks (third chart). (Data obtained from e-Signal). This gives us 3 perspectives, from the large caps (Dow stocks) to the broad marketplace (NYSE stocks) to the entire stock universe (U.S. stocks). Note that all 3 display a notable sudden upward trajectory from the Oct lows. Quite simply, buying involvement has consistently outweighed selling interest, too that has non abated. From that perspective, the rally is quite intact.
Does that hateful all is rosy inwards the stock universe? Not quite. As the bottom nautical chart illustrates, fewer shares convey been closing to a higher house their upper Bollinger Bands equally we've moved higher recently. Similarly, fewer shares convey been registering fresh novel highs vs. lows. For example, nosotros unopen at a novel high on Thursday, but alone 897 mutual stocks across all exchanges registered fresh monthly highs. Just a few days earlier, on Oct 31st, nosotros rang upwards 1975 novel monthly highs. We're exactly starting to encounter to a greater extent than or less divergences inwards the upside activity of stocks, with Russell too NASDAQ shares lagging the SPX of late.
Such divergences tin give the sack proceed for a spell during the maturation stage of a marketplace cycle, then I don't hold off whatever novel comport leg inwards the immediate future. It is when nosotros encounter cumulative selling involvement offset to equal too laissez passer on buying pull per unit of measurement area that nosotros know that a cycle is getting long inwards the tooth. The top 2 charts illustrate that quite nicely during the September topping. Nothing similar that is happening quite yet, but nosotros are seeing glimmers of differentiation inwards the patterning of marketplace strength.
Further Reading: Measuring Buying too Selling Power inwards the Stock Market
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