Constructing a nine-state trend, momentum, and breadth score

The construction begins with a simple claim: trend is the tendency of a series to keep its current direction, and momentum is a slower reading of price change over the same series. Because both ideas sit on one timeline, both can be measured with one family of moving averages.

One family of moving averages

A moving average here is an unweighted mean over a fixed lookback. It is applied once to the raw observations to form the trend filter, and again to that trend series to form momentum.

The trend filter is a short arithmetic moving average of the series under study, used only to mark whether the current path is rising, falling, or flat. Momentum is a longer arithmetic moving average of the trend filter. That slower line is the more heavily weighted input to the nine-state reading.

Weekly and monthly lookbacks

On weekly data, the trend filter is a five-week arithmetic moving average and momentum is a ten-week arithmetic moving average of that trend. On monthly data, the trend filter is a three-month arithmetic moving average and momentum is a six-month arithmetic moving average of that trend.

Slope labels become a nine-state score

Each line is first labeled plus, minus, or zero from its slope. Their intersection is then mapped to an integer from 1 through 9. A reading of 1 means both readings are healthy. A reading of 9 means both are negative. A reading of 5 means neither line shows much direction.

The nine-state score is that integer, with 5 reserved for a directionless turn. The mapping gives more weight to momentum than to the trend filter. It ignores whether the trend line sits above or below the momentum line and uses slope alone.

Market breadth as a participation label

Market breadth is read as a participation series. An upward-sloping line is treated as favorable when many stocks take part in an advance. That slope is then converted into the plus, minus, or zero label that feeds the score.

In this construction, market breadth is not a separate chart pattern sitting beside the averages. It is a participation series whose slope is treated as healthy when many issues join an advance, then turned into the same three-way label that enters the score.

A worked sequence and other series

A worked market-breadth example assigns successive scores of 6, 9, 7, 9, 7, 4, 1, and 3 as the trend-filter and momentum slopes change through a sequence from 1990 to 1991.

The same nested moving-average construction is shown on new housing starts, a gold futures price, and a contrary count of bearish advisors, and on market-breadth charts placed around autumn 1989, late 1991, and early 1992.