Cleaned breadth oscillator and new-high divergence: a swing-market case file

A case file, not a confirmation stamp

The archive describes a personal market-statistics workbook maintained over many years. Series were added and dropped, and about 200 daily semi-log stock charts were still posted by hand.

Market-breadth in this file means internal participation measures such as advancers versus decliners and new highs versus new lows, used to test whether an index move is broadly supported.

A cleaned common-stock sample

Exchange-wide advance-decline totals were treated as distorted by preferred shares, closed-end funds, and penny-stock moves. A parallel common-stock-sample excluded foreign listings and real-estate investment trusts and required at least a 12-cent daily move to count as up or down.

The 10-day oscillator and swing versus trend

An overbought-oversold oscillator was defined as the 10-day moving average of net advancers minus decliners. Strings of large negative readings were read as oversold, and strings of large positive readings were read as overbought. That construction is the advance-decline-oscillator in this file.

The oscillator was described as better suited to swinging markets than to strong trends, because a major trend can remain overbought or oversold. In those regimes, divergences were watched instead of oscillator turning points. That is the swing-versus-trend distinction.

Negative divergence and a thinning new-high list

A higher high in a benchmark such as the S&P 500 or Nasdaq against a lower high in that oscillator was labeled a negative-divergence and treated as a warning that the average could decline.

New-high and new-low counts were read the same way as breadth. A higher high in the Dow Jones Industrial Average and the S&P 500 versus the prior Friday arrived with fewer new highs, 336 then 254, and was taken as a tired, thinning advance. New-high-thinning is a rising index accompanied by a shrinking list of stocks making new highs, used as evidence that fewer names are doing the lifting.

Entries and exits as one procedure

Turning-point entries and exits were framed as one multi-indicator procedure combining the breadth oscillator, new-high counts, and sentiment. Extra weight was given to selected series when the readings disagreed and the tape turned choppy.

The late-March 2004 downside leg

A late-March 2004 downside leg was judged complete from three concurrent observations: an oversold tape, the Nasdaq Composite and a semiconductor index resting on still-rising 200-day moving averages, and a correction-minded advisory-sentiment share at its highest reading since 1992. A sentiment-extreme here is a crowded advisory reading used as a contrary condition when it coincides with an oversold tape.

A rest, not a major correction

A later push back toward recent S&P 500 highs was accompanied by far fewer New York Stock Exchange new highs than the prior peak, about 300 versus just over 600 late the previous year. That shrinkage was used to argue that many names would make lower highs.

After an approximately 10 percent Nasdaq bounce off the late-March lows, a maximum overbought reading by the week ended April 9 plus a waning new-high list was framed as a rest, not a major correction, because sentiment had not yet become overly bullish. A later push through old S&P 500 highs was expected to produce a negative new-high divergence and more bullish sentiment by May or June.

TradersWeek editorial reading: rest-versus-correction is the check that keeps a near-term overbought pause after a bounce from being upgraded to a major downturn until participation and sentiment confirm deterioration.