A count of component issues trading above a specified moving
average expressed as a percentage.
This is one of the most important indicators for measuring
participation. The 200-day moving average is a long-term
smoothing of price movement, and a stock's price in relation to
this moving average is a good indication of its long-term trend.
For example, when the price index moves below the 200-day moving
average, we can assume the long-term trend is down until the
price index moves back above the 200-day moving average.
There are no automatic assumptions that can be made about this
index. For example, just because 80% of stocks are above their
200-day moving average, there is no guarantee that a downside
reversal can't happen. In fact, once the index has moved to an
extreme end of its range, it's a good idea to be alert for a
change in direction, because the market improves until it is as
good as it can get, then it starts to deteriorate. Conversely,
as soon as things are as bad as they can get, they start
improving.
Interpretation:
The percentage of component issues above their 200 day moving
average is considered a reliable indicator of long term movement
in the securities market. When above 70% and subsequently
declining below 70% it is considered to mean that the long term
direction of the market has turned bearish. Vice-versa, when
below 30% and subsequently rising above 30% a bullish indication
is given.
The most important aspect of this indicator is the trend. When
the market is trending upward this index should be also be
trending up. A trend divergence indicates that fewer and fewer
stocks are in sync with the price trend and that a price
reversal is likely.
The shorter term moving averages provide remarkable insight into
the shorter term internal strength or weakness of the index or
ETF. Developing and deteriorating trends may be detected very
early.
|