Using Advance/Decline Ratios to Find Trades

10/11/2007 12:00 am EST

Focus: STRATEGIES

John Netto

Author, The Global Macro Edge

When attempting to gauge what direction the market is moving throughout the day or week, I use a few key indicators to measure short term and longer term market strength. Along with the Dow Jones Tic, the Arms Index, and current price action, I love to chart the ratio between advancing issues versus declining issues on the NYSE. I use CQG software and the symbol for that is DJIUP-DJIDN. 

This ratio is something I plot on a 3 minute chart and helps me ascertain if I should be buying dips in rising markets, selling strength in falling markets, or if the market is predisposed to trade in a range. The advance/decline ratio is very fluid on a 3 minute chart and I plot a 15 period simple moving average on top of it. Please see the chart below. 

The chart above demonstrates how the A/D line acts as nice confirmation in showing how there is an underlying shift in sentiment as displayed by the market internals on these charts. As a rule, you can overlay the two on top of each other to give you the best chance of entering a profitable position. 

I speak more about buying weakness in rising markets, selling strength in falling markets, and taking profits at predetermined price points in my book, One Shot–One Kill Trading, available at my website at www.osoktrading.com

John F. Netto

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