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Stock Market History Of High Momentum Thrusts at Trader’s Narrative

Every once in a while, the market has such strong momentum that the 10 day NYSE Advance Decline goes above 2:1. The historical data below is from Wayne, a regular reader and experienced CTA. As you can see, the latest one was just last week on July 27th 2009:

10 day adv dec highest examples since 1970

Wayne continues:

“I have advance/decline data going back to 1970. Note the only failure occurred in 1987, a year in which the S&P was up sharply for 3 and 6 mts before crashing 10 months later under the pressure of rising interest rates.

In his book Winning on Wall Street, Marty Zweig has an additional four listed from 1950-1969, that were 3-1 three months later and 4-0 six months later.

Also note that this is the second thrust this year. The two other calendar years that I have with two occurring are 1975 and 1982 (in bold) and both were very positive.

The concept is that market rallies are similar to rocket launches. Without the proper momentum they will not have the strength to leave the earths atmosphere. One way to measure the strength is a measure of broad participation via the A/D line over say a 10 day period. If the A/D over a 10 day period can achieve a level close of 2 (actually about 1.91 is the optimum level), then history suggest that there the market has the strength to sustain a meaningful rally.

These type of strong thrust moves have left many traders at the station. This most recent one is no different. There are very few who actually believe that this rally is the real deal. As well, this dovetails with the Lowry 90-90 days that show similar extreme thrust moves. You can see the extremely strong breadth in the NYSE and Nasdaq Summation Indexes as well:

NYSE summation index Aug 2009

Nasdaq summation index Aug 2009

Also, with today’s close we had 91% of the S&P 500 index components trading above their 200 day simple moving average. That is the highest for at least 5 years! The last time this indicator was this high was in late February 2007 - when the Standard & Poor’s 500 was trading at 1460.

Based on these sort of indications, my hunch is that we are going to continue higher in the medium to longer term but with a short term pause or correction. The flag pattern comparison was right on the money, if I do say so myself ;)

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4 Responses to “Stock Market History Of High Momentum Thrusts”  

  1. 1 Rob Weigand

    Just to clarify, is the conclusion of your analysis that stock prices will continue rising because they’ve been rising?

  2. 2 Babak

    Rob, no. The conclusion is that we are seeing a rare extremely powerful thrust which has historically presaged a prolonged uptrend.

  3. 3 mike

    Interesting. According to our data, Wayne missed a signal in 1985 (jan 22nd) that worked, and a signal in 1992 (jan 6) that did not.

    Furthermore, we cant figure out how he’s computing the returns. It is not stated when the returns are on the SPX or NYSE composite. Let’s assume the latter. The signal triggers at close of business on monday march 23. Assuming execution at the monday closing level on the morning of the 24th, and holding through june 23, the NYSE is up 12%. The only way to get 20% is to include Monday the 23 when the NYSE was up 7%, which assumes you exeute monday morning without knowing that the signal triggers at close of business on the same day. So its not clear how the numbers actually work.

  4. 4 wayne

    Advance decline 2/1 calculations are on NYSE data which is what most analyst use for breadth and A/D analysis. The following % changes are on S&P data, because that is what I trade and I have closing day price data on. Many analyst do similar analysis on other indexes that are informative as well. For example you had many 2/1s on Nasdaq in the 90s that you didn’t get on the NYSE. Some analyst with the research staff will actually go to the trouble of taking out the preferred stocks and such.

    I have the 10 day AD line on Jan 22, 1985 at 1.95 and on Jan 6 1992 at 1.97 It could be data entry or different data providers but I notice that my numbers are same as another report I have seen on the subject. There’s nothing magic about 2/1, it just makes for easier story. The 1.95’s are decent as well. Pick out whatever works for you.

    The 3 month forward performance was actually a 63 forward trading days performance and I should have labeled as such. Similarly the 6 month was 126 days and the forward 12 months was 252 days. Over the last 20 years, most calendar years have 250-253 trading days in them. Exception would be 2001 when we shut down for a week.

    Glad to see someone is following up

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