From the July 01, 2011 issue of Futures Magazine • Subscribe!

Profits rocket with breadth thrust signals

The genesis of more recent thrust research came in the fall of 2009 when it was discovered that the signals described here are one of the more reliable intermediate-term equity index signals in existence. This does not mean the indicator doesn’t miss opportunities, however. You may have observed that the signals went AWOL during the 1990s — a decade in which the S&P tripled. Nevertheless, the signals are too statistically significant to ignore when they do trigger.

Because of their rare occurrence, these signals can’t be traded alone. You’ll need something to trade if they go through another silent decade. After additional thrust research, it became evident there are other market internals besides 10-day breadth that can be utilized to measure the market’s potential for launching equity prices from point A to point B. My initial research in this area was summarized in a research paper titled "Planes, Trains and Automobiles (PTA)." It was recognized by the Market Technicians Association (MTA) with the 2010 Charles Dow Award and is outlined in the following five steps:

  1. Revisit the significance of breadth (advance/decline) thrust in launching major market moves.
  2. Evaluate the utility of evaluating market momentum via measures other than breadth.
  3. Study the statistical significance of reverse thrust, commonly referred to as capitulation.
  4. Study the significance of lack of thrust signal sightings over extended periods.
  5. Combine all the above research into an intermediate-time frame trading model.

Measuring market momentum

The approach was to revisit thrust research starting from square one. The effort evaluated as many measures of market momentum as possible over time periods from one to 63 days and identified those that were highly reliable in signaling intermediate (three- to 12-month) moves in the S&P 500. Techniques studied included breadth (advances vs. declines), up vs. down volume, price change, Trin (volume in advancing vs. declining issues), number of issues making 12-month highs and 12-month lows.

Most of the indicators studied did not prove to be viable, but much was learned in the process, and it helped provide the basis for the thrust model known as the PTA tape model (referred to as PTA7, for being the seventh version).

PTA7 breadth thrust model

The PTA7 model utilizes thrust signals from various sources. We will address the new version of the breadth thrust component implemented. The cumulative advance/decline line on the NYSE is the traditional measure of market breadth. It customarily is used because it yields a broad measure of the number of predominantly Blue Chip issues participating in either upward or downward moves. Similar analysis could and has been performed successfully with other indexes as well as derivations of the NYSE Composite.

Since Zweig published "Winning on Wall Street" in the mid-1980s, the NYSE has become increasingly polluted with non-equity issues, such as bond funds. Most research firms have moved to equity-only indexes for tape analysis. This author’s current research in this area uses tape data on the equity-only S&P 500 index.

The breadth measure incorporated here is simply the percent of daily advances over an n-day period as a percentage of both advances and declines (or issues traded minus unchanged) during the same period of interest,

ADTN = 100 * SUMADV / (SUMADV + SUMDEC)

where SUMADV is the sum of daily advances over n days.

As an example, for a 10-day period where advancing issues lead declining issues by a two-to-one ratio, we would generate an ADT10 of 66.66.

This seems like a logical equation for this type of analysis. It also has been referred to as a Zweig Thrust Measure. When using the S&P data set, all time frames from one to 21 days result in some degree of statistically significant breadth thrust at certain high and low levels of measurement. "One-year results" (below) includes a breakdown of the forward one-year performance for all days since 1970 as a function of the ADT10 level.

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The category above 65, which was similar to the two-to-one ratio on the original thrust measurement, was up 91% of the time one year later for an average 14.33% return. Note that low levels are bullish, as well.

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