Diagnosing market bottoms with breadth, divergence and averages

A three-layer confirmation exam

Editorial framing: a suspected major low can be read as a confirmation sequence rather than a single print. A moving-average envelope locates stretch in price. Breadth divergences then test whether internals agree with that low. Dual-average flips decide when the internal series actually changes state.

The archive supplies the overlay, the market-breadth series, and the moving-average rules used in that exam. The three-layer order is editorial.

A moving-average envelope locates the stretch

The NYSE Composite overlay used a 21-day moving average together with a trading band set 3 percent above and below that average. The band marked where a decline or rally was treated as extended.

Editorial reading: that envelope is the first layer of the exam. It locates stretch in price before internals are asked to confirm a low.

Breadth divergences test whether internals agree

Market breadth is used to judge whether a price extreme is supported under the surface. The measures in this workflow are advancing versus declining issues, up versus down volume, and new highs versus new lows. Divergence is a split between the path of price and the path of a related breadth series, used to treat a new price extreme as incomplete or suspect.

The advance-decline line is the cumulative difference between advancing and declining issues. A move of that line through a prior high or low is treated as a condition price often later follows.

The daily arms index is advancing issues over declining issues, divided by up volume over down volume. A 10-day average of the arms index in the 1.20-1.30 range was treated as near an important low. A 3.97 reading in October 1987 was called an aberration. Values below 0.80 were said to persist for long stretches near highs.

The McClellan oscillator equals the 10-day average of net advances minus the 20-day average. It is read for divergences versus price, trendline breaks, and moves through zero.

Dual-average flips mark a change of state

Advance-decline and high-low differentials each compare a 10-day average with a 30-day average. The shorter average crossing above the longer one is treated as the basic positive condition. The same construction is applied to net advances and to new highs versus new lows.

Editorial reading: the dual-average flip is the third layer. It decides when the internal series actually changes state, after stretch and divergence have been checked.

How selected lows were read

In late December 1986 the cumulative advance-decline line broke August-September support while the composite remained above its matching lows, then reversed through a downtrend. That instance was labeled a false downside breakout.

At that same low the McClellan oscillator held an uptrend on the 31 December decline and then cleared resistance and the zero line, while the 10-day advance-decline differential made a higher low near -300. Editorial reading: internals did not confirm the downside break, and the later differential print was a higher low rather than a fresh breakdown.

In October 1985 the advance-decline line did not make a new low with price. At the 1982 summer low the 10-day arms index reading exceeded 2.60 in late July and was 1.5 at the price trough, and the 10-day advance-decline differential later reached +724. Editorial reading: the 1985 episode is a split between price and the advance-decline line, while the 1982 episode shows a stretched arms index at the trough and a later positive reading on the advance-decline differential.

Checks after a McClellan low

After a McClellan low and rebound, a later dip during a price retest is checked against a session with more than 300 net advances. A one-day oscillator change of five points or less is treated as a short-horizon cue in the direction of that change, with a reaction window of as many as four sessions.