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Introducing FIRE: A package of breadth indicators on any stock group you like

July 16, 2012

16 July

I’m now able to show you what FIRE, my new Metastock add-on can do.

FIRE allows the creation of breadth indicators on custom stock groups. Most breadth data available is across whole exchanges such as the NASDAQ, or for capitalisation segments like mid cap stocks. This includes data from Pinnacle Data Corp, which I have shown you in previous weeks.

If however your interest is a particular group of stocks, maybe that comprise a sector or country ETF, then FIRE comes into its own. With FIRE, I can identify rare, high probability turning points from breadth divergences. I can do this for you, on your stock groups!

FIRE allows the following type of breadth indicator to be created:

Range bound indicators

  • Moving average breadth: The number or proportion of stocks above their moving average. Set the MA period to whatever you want.
  • Moving average crossover breadth: For rising stocks, a shorter period moving average is above a longer period moving average. See the number or proportion for any MA combination.

Cumulative indicators

  • Cumulative advancers minus decliners (an advance-decline line)
  • Cumulative new X day highs minus new X day lows (for example, for a new 52 week highs – 52 week lows line). This was the indicator found most useful on the exchange wide breadth data
  • Cumulative advancing volume minus declining volume. This will be biased towards the higher market cap/ lower denomination stocks

Other indicators, such as McClennan Oscillators, ARMs Index are available. I will stick for the most part to following:

  1. Moving average breadth
  2. Cumulative advancers – decliners line
  3. Cumulative new highs – new lows line

Examples of moving average breadth divergences found using FIRE

The SPDR Consumer Discretionary (XLY) is an ETF with 81 components that has traded since late 1998. The chart shows the major breadth divergences between price (top window) and the %age of components above their 200 day moving average (bottom window).

SPDR Consumer Discretionary (XLY) and 200 day MA breadth

Xly200breadth

 

  • In March 2003, a new price low forms with a bullish divergence. The first bullish divergence in October 2002 offered temporary reprieve but a new low was made in March
  • In April 2004, a bearish divergence forms. The setback is 10.9% over four months. This divergence takes a while to kick in. The February and March divergences did not prove the top, so beware, not every divergence is a top
  • In June 2007, a bearish divergence  forms. This is a bigger divergence than in 2004 and marks the top
  • In July 2008, a bullish divergence forms and the ETF rallies but not every divergence is a long term turning point and new lows are formed
  • In March 2009, the low is formed on a divergence
  • There are no bearish divergences until July 2011. That marks a peak, until new highs are made in early 2012
  • In April 2012, a bearish divergence marks a peak. This is a very minor short term divergence (easily missed) but more significant is the divergence across peaks to previous years. This shows a longer term drop off in participation in the bull market since 2009

So there are important turning points picked out by this data but the caveats are:

  • Not every divergence marks a turning point
  • Not every turning point is a long term peak or trough
  • Other factors, such as market cycles decide the above
  • Breadth divergences coinciding with RSI divergences are stronger candidates

This blog shows the value of breadth divergences and in the next blog, I’ll show some current examples.

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