Market Indicators

Advance-Decline Line (AD Line)

The Advance-Decline Line (AD Line) is a cumulative market indicator that illustrates the differences between the amount of rising and declining stocks each day. The difference between the number of advancing stocks and the number of declining stocks is referred to as the Net Advance. Though this indicator is calculated daily, it is cumulative meaning that the Net Advance (+ or -) is added to the previous result and ultimately either increases or decreases the overall value of the line. The AD Line has many purposes: it can validate price trends, alert an investor of a potential reversal, and overall highlight whether more stocks are rising or falling. If one simply desires to look at the plotted AD Line, it is quite useful for gauging market participation. To do this, the Line must be compared to other major indexes. When the Line increases along with an underlying index, a bullish market is indicated and thus traders are buying into the market. If the Line falls along with the index, it confirms the downward trend. Inverse divergent relationships between the Line and the underlying index demonstrate an unhealthy, bearish market where traders are exiting. Furthermore, when the AD Line does not follow suit with the index it could indicate that the index is nearing the end of its surge or decline.

The AD Line has one important limitation in regard to the NASDAQ. The NASDAQ’s AD Line acts differently than most others due to the composition of the index. Though this marketplace is composed of some of the largest corporations, it also frequently obtains small companies that often fail and are thus removed from the index. However, before they fail, their calculations are added to the cumulative AD Line, which can cause the NASDAQ’s AD Line to drop for much longer than other Lines, even though the index may be rising. Therefore, the NASDAQ’s AD Line might not always be the best signal when attempting to determine market participation and overall health.

Arms Index (TRIN)

The Arms Index, also known as the Short-Term Trading Index (TRIN), is an oscillating market indicator that focuses on the relationship between two Advance-Decline (AD) calculations. Similarly to the AD Line, the TRIN’s overall goal is to understand market health. However, it is also useful for identifying overbought and oversold conditions and predicting potential future price movements. To formulate the TRIN, an investor must divide the AD ratio by the AD Volume.

The AD Line is similar to the TRIN in many ways, yet the greatest difference lies in the TRIN’s inverse relationship to the market. When the AD Volume is higher than the AD Ratio, the TRIN’s value will be below one. This generally indicates a powerful market increase. Conversely, when the AD Volume is less than the AD Ratio, the TRIN will be above one. A TRIN above one generally signals a forceful market decline. When the TRIN’s value is exactly one, the AD Ratio and the AD Volume are equal, which indicates market neutrality. Oversold and overbought conditions are illustrated by extreme values of the TRIN. A TRIN value higher than 3.0 signals oversold conditions. Conversely, a value below .5 indicates overbought conditions. The TRIN is extremely useful for identifying overbought and oversold levels as well as highlighting the overall trend direction. However, it is quite volatile. As such, it should never be employed without other components of technical analysis.

High-Low Index

The High-Low Index is a market indicator that portrays a relationship between various securities based on their 52-week highs and 52-week lows. Mainly, the High-Low Index is employed by investors to confirm trends. To understand the calculation of the High-Low Index, one must understand the Record High Percent. The Record High Percent is based on new highs and lows of a security. To calculate the Record High Percent, one would simply divide the new highs by the new highs + the new lows, and then multiply the quotient by 100. This same calculation is utilized for the High-Low Index. A result above 50 indicates that more stocks are reaching their 52-week highs than lows and thus a bullish market is signaled. Conversely, a result below indicates that more stocks are reaching their 52-week lows and thus a bearish market is signaled. Trends are indicated by more extreme results. A result above 70 signals an upward trend, while a result below 30 suggests a downward trend.

The High-Low Index seems quite simple and useful at first glance, yet it has its drawbacks. 52-week highs and lows are considered by many investors to be “lagging indicators”, meaning that the market can experience a reversal well before there is a large shift in the 52-week high and/or low. Thus, the High-Low Index should not be solely relied upon. It provides valuable data, but would certainly need to be used alongside other technical/market indicators.

McClellan Oscillator

Developed by Sherman and Marian McClellan, the McClellan Oscillator is a market indicator that illustrates market breadth by analyzing the difference between advancing and declining issues on stocks (Net Advance). Chiefly, the McClellan Oscillator examines the strength of an index and highlights powerful shifts in market sentiment. Similar to the MACD, the McClellan Oscillator adds momentum to the AD Line and thus provides a more well-rounded understanding of the relationship between advancing and declining stocks.

The formula for the McClellan Oscillator can be applied to any group of stocks. A positive reading, or a reading above zero, verifies a rise in the index and thus indicates that there are more advancing stocks than declining stocks. Conversely, a negative reading confirms a decline in the index and thus signals that more stocks are declining than advancing. Divergences between the index and the Oscillator often occur and ultimately portray the strength of the index. If the index rises while the Oscillator falls, the index may soon begin its descent. On the other hand, if the index falls while the Oscillator rises the index may soon begin increasing. In other words, divergences between the index and the McClellan Oscillator could foreshadow a trend reversal of the index. Another movement of the McClellan Oscillator can be witnessed and interpreted when a “breadth thrust” occurs. A breadth thrust takes place when the McClellan Oscillator dramatically increases from negative territory to positive territory. Usually, a breadth thrust is signaled by a movement of 100 points or more, such as from -50 to +50. When the McClellan Oscillator experiences a breadth thrust, a strong reversal from a downtrend to an uptrend is indicated. Not always, but often the advance resulting from a breadth thrust may be experienced for an extended period of time. Clearly, the McClellan Oscillator has the potential to frequently provide many signals that can allude to trend reversals and index movements. However, it is important to note that these signals do not always guarantee movement. The McClellan Oscillator produces false signals somewhat often and as such should be employed alongside other technical and market indicators.

McClellan Summation Index

As one may infer, the McClellan Summation Index has a direct relationship to the McClellan Oscillator. Not only was it developed by the same two people, but the data presented by the McClellan Summation Index is born from the McClellan Oscillator. Their relationship can be understood as such: the McClellan Summation Index is a running sum of the daily values provided by the McClellan Oscillator. Primarily, the McClellan Summation Index highlights bullish or bearish bias and illustrates the strength of a trend. Bullish or bearish bias are both indicated by readings around the zero line. A bullish bias is signaled by positive readings, while a bearish bias is signaled by negative readings. However, these readings take a long time to produce themselves. The McClellan Summation Index will land in positive territory if the McClellan Oscillator has been positive for quite some time. Conversely, the Summation Index will fall into negative territory if the McClellan Oscillator has been negative for an extended period of time. Due to the sheer amount of time the Summation Index requires, it is best suited for medium to long-term analysis. Bullish and bearish divergences can also be indicated by the McClellan Oscillator. A bullish divergence occurs when the Summation Index performs a higher low than the index itself. On the other hand, a bearish divergence occurs when the Summation Index presents a lower high than the index itself.

As previously discussed, the McClellan Oscillator places momentum into the AD Line. However, this momentum is removed by the McClellan Summation Index due to the amount of time needed to collect data. Furthermore, to calculate the Summation Index, three separate formulas are required. These are not necessarily negative things, but investors should keep in mind how its calculation affects the Net Advance. As with all indicators, the McClellan Summation Index’s results should be verified by utilizing other indicators.

Put/Call Ratio

A put/call ratio is a widely used market indicator that assesses market sentiment. The “put” component of the ratio is utilized to bet against the market, or in other words, to bet on a decline. Conversely, the “call” component of the ratio is utilized to bet on the strength of the market. The “put” option of the put/call ratio gives an investor the right to sell an asset at the desired price, while the “call” option provides investors the opportunity to buy an asset at the desired price. Investors may examine market sentiment by observing the trading levels of the put/call ratio. Trading levels are high when traders are purchasing more puts than calls; levels are low when traders are purchasing more calls than puts. When the put/call ratio is trading high, a bearish market is indicated. On the other hand, when the put/call ratio’s trading levels are low, a bullish market is indicated. The put/call ratio can also be employed by investors who seek to identify extremities in the market. An extremely high put/call ratio signals that the market is incredibly bearish, while an extremely low put/call ratio value signals that the market is incredibly bullish.

To calculate the put/call ratio, an investor would simply need to divide the amount of traded puts buy the amount of traded calls. A resulting value above 0.7 or above 1.0 signals that traders are purchasing more puts, and thus a bearish market is indicated. A resulting value below 0.7 or approaching 0.5 signals that traders are purchasing more calls, and thus a bullish market is indicated. A put/call ratio value of 1.0 is possible, and by definition would indicate traders are equitably purchasing puts and calls. However, this is not entirely realistic. Most investors believe that a put/call ratio of 1.0 signifies that more investors are buying calls than puts.

The put/call ratio is one of the most popular indicators utilized by traders. However, there is not one ratio that is considered impeccable at measuring market extremities or predicting potential market conditions. Put/call ratio values are not permanent and may waver over a few years. To confirm the signals provided by the put/call ratio, many investors compare its values to an average over a chosen period of time. Key takeaways of the Put-Call Ratio are presented here.

Record High Percent

To understand the Record High Percent as a market indicator, one must become familiar with the Record High. The Record High is the highest historical value of a security. It is recorded from a security’s birth to its last closing value and does not account for inflation. For some investors, a Record High indicates that the security will continue to improve, and as such, they might decide to buy. For others, a Record High might signal that the security has reached its peak and will decline in the near future. Thus, they may decide to sell. The Record High Percent uses the basic principles of the Record High, yet applies its methodology to multiple assets at once. This market indicator examines the new highs and the new lows of multiple securities and provides a value for investors to assess the market. “New highs” factors in securities that have been performing in their 52-week highs. “New lows” takes into account securities that have been reaching their 52-week lows. To calculate the Record High Percent, one would simply divide the new highs by the number of new highs plus the number of new lows. This value is then multiplied by 100 to provide values that fluctuate between 0 and 100. Record High Percent values above 50 indicate a bullish market, while values below 50 indicate a bearish market. The Record High Percent can also be employed to assess market trends by examining extreme values. A Record High Percent value that consistently remains above 70 signals an upward trend, while a value that consistently remains below 30 signals a downward trend.

At the end of the day, the Record High Percent is simply a percentage and therefore it can be somewhat deceiving. 52-week highs and lows are considered “lagging indicators” meaning that the market can reverse well before a shift in 52-week highs and lows. As with all indicators, the Record High Percent is best used alongside other indicators.

Volatility Indices

The volatility indices measure the implied volatility for a basket of put and call options related to a specific index or ETF. The most popular one is the CBOE Volatility Index ($VIX), which measures the implied volatility for a basket of out-of-the-money put and call options for the S&P 500. For more information, see the Volatility Index and the CBOE Volatility index VIX.