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Market Timing – Strength Indexes

Tom Ventresca
Tom Ventresca
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The Strength Indexes measure accumulation/distribution in the major indexes.

The Market Edge ( 'Market Letter' is a weekly publication that combines three proprietary market-timing techniques into a computer model which attempts to forecast the direction of the market as measured by the Dow Jones Industrial Average (DJIA). The computer model is known as the 'Market Posture' and it is either bullish, bearish or on rare occasions, neutral. The Market Posture has a track record dating back to 1974 of accurately forecasting the intermediate term direction of the DJIA with better than 80% accuracy.

The DJIA seldom moves up or down in a straight line. Instead, an up or down move over a period of time is typically accompanied by periods of strength or weakness that go against the current trend. In addition, markets don't always move in tandem. While the DJIA may be in a powerful up trend the NASDAQ or the OEX may be in a consolidation phase. To address these situations, Strength Indexes, which measure accumulation and distribution for the three major indexes have been developed and are included in the Market Letter.

Strength Index - DJIA (DIA): 60.0 55.0 POSITIVE
Strength Index - NASDAQ 100 (QQQ): 41.7 40.7 NEGATIVE
Strength Index - S&P 100 (OEX): 56.7 51.7 POSITIVE

Strength Indexes are technical indicators that signal when a counter move to the prevailing Market Posture is likely to occur. The Strength Indexes are constructed by dividing the number of stocks which are deemed to be under accumulation (bullish) by the number of stocks in the index. The result is a number that ranges between 0 and 100 which is the percentage of stocks in the index that are under accumulation. Strength Index readings over 50% are considered to be positive (bullish) while those under 50% are negative (bearish).

Accumulation is a technical term which means that over a period of time, the stock has traded more shares on up days than on down days suggesting more buyer induced transactions. The Market Edge Up/Down Volume Ratio and U/D Slope identify stocks which are under accumulation. The U/D ratio is a 50-day ratio of a stock's daily up-volume to daily down-volume. This ratio is calculated by dividing the total volume on days when a stock closed up by the total volume on days it closes down. Readings of 1.0 and greater denote accumulation (bullish), while readings under 1.0 signal distribution (bearish). The U/D Slope identifies the direction in which the Up/Down Volume Ratio is pointed. Although the raw U/D Volume Ratio is a valuable indicator, it is the direction or Slope of the ratio that forewarns of a change in the trend of the index's price. If the ratio was at 1.5 and is now 1.2, the U/D Slope would be negative despite a bullish reading of over 1.0 since the value is on the decline.

The Strength Indexes are a powerful tool when combined with the Market Posture and should be used in conjunction with the Market Posture when determining entry and exit points into the market. . When the Market Posture is bullish and the Strength Index is positive, expect favorable price action. A bullish Market Posture coupled with a negative Strength Index warns of a consolidation phase. Conversely, a bearish Market Posture and a negative Strength Index would suggest a period of declining prices while a bearish Market Posture and a positive Strength Index would imply a period of positive consolidation.

The Strength Index's are updated weekly and are located in the 'Market Letter', under the Market Posture section.

Tom Ventresca will be available to take your questions until Monday, January 2. Please use the form below to submit your questions.

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