Thursday, October 26, 2006

Advancing Issues

Here is a line chart of the daily count of the number of issues traded on the New York Stock Exchange which advance in price. I last commented on this indicator here.

The black line on the chart is the daily count of advancing issues. The purple line is the 5 day moving average of this number. The horizontal red line is the level I am currently using to indicate an "overbought" condition for the 5 day moving average. The light green and the dark green horizontal lines are repectively the moderate and the severe "oversold" levels for the 5 day moving average.

Notice that on October 16 the moving average kissed the overbought level and has since fallen away while the market averages have moved higher. Along the same lines the daily count shows two lower tops since its recent peak on October 12. This situation shows a moderate divergence after reaching overbought levels and as such has mild bearish implictations.

This is one reason I am currently expecting a 20-30 point break. If it materializes I think the low of the break will develop on or after the 5 day moving average touches the light green line indicating a moderate oversold condition. I would also expect to see the daily count of advancing issues start to move upwards before the reaction low is in place.

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