Stock Chart. Advance decline, S&P 500, trading system, advance, decline, chart, S&P 500 chart

Advance/Decline Ratios in Defining Support Levels

(Indicators based on the "advances" and "declines" concept)

Description: Developing a trading strategy and trading system on analysis of the historical advance/decline volume and issues ratios of the S&P 500 index to generate mid-term "Buy" signals

In the "Advance/Decline Mid-term Support" article, we define the critical levels for the advance/decline volume ratio indicator, with the purpose of establishing the best possible trade entry points.

Below, we make extensive use of two new volume-based indicators: (1) the advance/decline (AD) issues ratio and (2) the AD volume ratio. For the following study, we analyzed the trading activity of the S&P 500 index between October 15, 2003 and October 15, 2004. In Table 1 below, we listed those days, on which the highest positive A/D issues ratios occurred.

Table1: Highest A/D Issues Ratios in the S&P 500 index. October 15, 2003 to October 15, 2004. (Cut-off level: Only values greater than 9 were selected – see text for explanations).

Date	Advance/Decline  Issue Ratio
12/29/2003		16.86
3/12/2004		9.25
3/17/2004		9.76
3/25/2004		9.91
3/29/2004		10.18
5/25/2004		18.04
6/7/2004		22.48
8/10/2004		11.72
8/16/2004		16.14
8/18/2004		10.79
9/2/2004		9.53

Next, we created an overlay, plotting the selected data from Table 1 onto a chart of the S&P 500 index (see Figure 1, below):

Figure 1. Highest A/D Issues Ratios in the S&P 500 index. October 15, 2003 to October 15, 2004. (Using a minimum cut-off level of 9).

Next, we repeated this exercise using a reverse approach. Instead of studying the highest values, we looked at the lowest A/D issues ratios that occurred in the S&P 500 index between October 15, 2003 and October 15, 2004. We have compiled this data in Table 2.

Table 2. Lowest A/D Issues Ratios. S&P 500 index. October 15, 2003 to October 15, 2004 (Cut-off level: Only values smaller or equal to 0.12 were selected – see text for explanations).

Date	Advance/Decline  Issue Ratio
3/10/2004		0.12
3/11/2004		0.12
3/22/2004		0.10
4/13/2004		0.06
5/7/2004		0.10
5/17/2004		0.11
8/5/2004		0.05
9/22/2004		0.10

Next, created an overlay, plotting the values from table 2 on a chart of the S&P 500 index (see Figure 2, below):

Figure 2. Lowest A/D Issues Ratios in the S&P 500 index. October 15, 2003 to October 15, 2004. (Using a maximum cut-off level of 0.12).

Looking at the chart above, you can see that the lowest A/D issues ratios (that fall within range of our cut-off level) seem to occur with some regularity near index support points, and that they seem to fairly reliably precede index reversals to the upside.

Continuing our line of thought, we looked at another volume-based indicator, the A/D volume ratio. In this specific context, the A/D volume ratio will tell us how active the declining stocks (issues) were on days where the A/D issues ratio fell below the 0.12 level.

Table 3. Lowest A/D Issues and AD Volume Ratios in the S&P 500 index. October 15, 2003 to October 15, 2004.

Date		Advance/Decline  Issue Ratio				Advance/Decline  Volume Ratio
3/10/2004			0.12				0.29
3/11/2004			0.12				0.17
3/22/2004			0.10				0.10
4/13/2004			0.06				0.11
5/7/2004			0.10				0.36
5/17/2004			0.11				0.08
8/5/2004			0.05				0.08
9/22/2004			0.10				0.14

The above helps us in clarifying our market picture. Figure 4 reflects the new situation.

Figure 3.  Days with critical A/D issues ratios (top indicator) and A/D volume ratios (bottom indicator). S&P 500 index. October 15, 2003 to October 15, 2004.

Based on Fig. 4 above, we can now formulate a preliminary trade entry strategy for mid-term traders who wish to go long the S&P 500 index:

If - during a well-established downtrend on the S&P 500 – we see the A/D issues ratio fall below 0.12, and the A/D volume ratio decline to around the same level, we can likely anticipate a reversal to the upside within a few days. The strength and duration of the ensuing up-move will depend on how substantially the index previously declined; depending on this, the reversal could this be short-lived, or it might be substantial (i.e., prolonged).

It is understood that this trading strategy can also be applied to other indices (such as the NASDAQ 100, DJI, and others), although the actual indicator parameters would likely have to be fine-tuned.

Prev

Next

A. v. S.
V. K.

Copyright 2004 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Tags: S&P 500 chart, chart, decline, advance, trading system, S&P 500, Advance decline

Investment Products:

Technical Analysis The most popular technical studies on the advanced charts.

Uncovered Options Learn how to make options time decay work to increase your portfolio.

Stock Market Articles investments and trading related articles directory.