Advance Decline Oddity

When trying to assess daily market internals, it is helpful to follow the Breadth, or the Advance/Decline Lines (number of stocks positive for the day vs. the number of stocks negative for the day).

I plot these lines to create an inverse graph, rather than simply following the breadth number because it helps show the past and the trend of the breadth better for me.  When the breadth is skewed positive, I only take long trades and vice versa when the breadth is skewed negative.  If the breadth is narrow, I am looking to step aside or trade with small size if I need more practice on a particular strategy.

The breadth line also helps in taking setups from stocks, which can provide much more movement with price patterns and daily bais than the ETFs or even index futures.

Normally, the breadth is skewed in one direction or the other, and may switch once or twice daily.  Yesterday (Thursday), there was an oddity in the breadth which caused me frustration and a couple of whipsawed trades.

Of course looking in hindsight, the action is clear and the market was rangebound, and the best play would have been to fade extremes, but it is often difficult to anticipate a rangebound market and difficult to make money when your bias is for trend trading tactics.

I am showing the Dow Jones Index and using the standard stochastic settings.  For TradeStation, the Advance line is plotted with $ADV and decline line with $DECL.  For the Nasdaq, the symbols are $ADVQ and $DECLQ respectively.  Combine the Breadth with the TRIN for the overall (yet lagging) bias of the day for the market.

The day’s action saw six changes of leadership in the breadth.  Indeed, it was a choppy day.  One can imagine that consolidation was necessary after the large increase following the “Fed Decision” rally.

Today (as of 11:00 EST) we have positive breadth (+500) and a tempered bullish bias.  We will soon see if that will be reversed!