Percent Above Moving Average
The percentage of stocks above a given moving average is shown by a breadth oscillator.
Percentage of Stocks Above a Moving Average: Internal Market Strength or Weakness
It would be useful to know whether there is internal strength supporting an index’s continued upward trajectory. One market breadth indicator that may be used to gauge the internal strength or weakness of an underlying index is the proportion of stocks that are trading above a particular moving average.
The percentage of companies trading above the 50-day moving average is useful for short-to-medium-term timeframes. It’s better to examine the proportion of companies trading above the 150- and 200-day moving averages for medium- to long-term periods. Bullish/bearish divergences, overbought/oversold levels, and crossovers above/below 50% can all provide trading indications.For the Dow, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500, and S&P/TSX Composite, the indicator is accessible. The percentage of stocks over their 50-, 150-, or 200-day moving averages can be plotted by users of SharpCharts. This article ends with a complete list of symbols.
Calculating Percentage Above MA
Copy
(number of stocks above 50-day moving average)
Percent above MA = ----------------------------------------------
(total number of stocks in index)
Nasdaq 100 example: 60/100 = 0.60 or 60%
S&P 500 example: 80/500 = 0.16 or 16%
Dow Industrials example: 7/30 = 0.2333 or 23.33%The formula is simple: divide the number of stocks in the underlying index by the number of stocks above their XX-day moving average. Sixty equities are trading above their 50day moving average in the Nasdaq 100 sample.Since the index consists of 100 equities, 60% of the stocks are above their 50-day moving average. With 50% as the center line, the figure below illustrates how various indicators vary from 0% to 100%.
Percent Above SMA – Example
What Does the Percentage of Stocks Above a Moving Average Tell You?
This indicator measures the degree of participation. Breadth is strong when the majority of stocks in an index are trading above a specific moving average. Conversely, breadth is weak when the minority of stocks are trading above a specific moving average. There are at least three ways to use these indicators. First, chartists can obtain a general bias with the overall levels. A bullish bias is present when the indicator is above 50%. This means more than half the stocks in the index are above a particular moving average. A bearish bias is present when below 50%. Second, chartists can look for overbought or oversold levels. These indicators are oscillators that fluctuate between zero and one hundred. With a defined range, chartists can look for overbought levels near the top of the range and oversold levels near the bottom of the range. Third, bullish and bearish divergences can foreshadow a trend change. A bullish divergence occurs when the underlying index moves to a new low and the indicator remains above its prior low. Relative strength in the indicator can sometimes foreshadow a bullish reversal in the index. Conversely, a bearish divergence forms when the underlying index records a higher high and the indicator remains below its prior high. This shows relative weakness in the indicator that can sometimes foreshadow a bearish reversal in the index.
50% Threshold
The percentage of equities above their longer moving averages, like the 150-day and 200-day averages, is where the 50% criterion performs best. The percentage of stocks that are above their 50-day moving average is more erratic and frequently surpasses the 50% mark. It is more vulnerable to whipsaws because of this volatility. The S&P 100% is displayed in the graphic below.above the $OEXA200R 200-day MA. The 50% criterion is indicated by the blue horizontal line. Observe how, in 2007, this level served as support when the S&P 100 was rising (green arrow). In 2008, when the S&P 100 was in a downward trend, the 50% level became resistance after the index broke below it at the end of 2007. In June and July, the indicator rose above the 50% mark once more.2009.
Percent Above SMA – Chart 1
The indicator is susceptible to whipsaws even if the percentage of stocks over their 200-day SMA is less erratic than the percentage of stocks above their 50-day SMA. Several crossovers occurred in August-September 2007, November-December 2007, May-June 2008, and June-July 2009, as shown in the above chart. By smoothing the indicator with a moving average, these crosses can be minimized. The indicator’s 20-day SMA is displayed by the pink line. Observe how there were fewer instances of this “smoothed” version crossing the 50% threshold.
Overbought/Oversold
The greatest indicator of overbought and oversold conditions is the percentage of equities over their 50-day SMA. Compared to indicators based on lengthier moving averages (150day and 200day), this indicator is more volatile and will frequently swing to overbought and oversold levels.This indicator can become oversold multiple times during a strong downturn or overbought many times during a strong upswing, much like momentum oscillators. In order to build a bias and trade in accordance with the larger trend, it is crucial to determine its direction. If the long-term trend is upward, it is better to have short-term oversold conditions; if it is downward, it is better to have short-term overbought conditions. The trend of the underlying data can be discovered using basic trend analysis.
The chart below shows the S&P 500 Percent Above 50-day MA ($SPXA50R) with the S&P 500 in the bottom window. A 150-day moving average is used to determine the bigger trend for the S&P 500. Notice that the index crossed above the 150-day SMA in May and trended higher over the next 12 months. With an overall uptrend in progress, overbought conditions were ignored and oversold conditions were used as buying opportunities.
Percent Above SMA – Chart 2
In general, readings above 70% are deemed overbought and readings below 30% are deemed oversold. These levels may vary for other indices. First, notice how the indicator became overbought numerous times from May 2009 until May 2010. Multiple overbought readings are a sign of strength, not weakness. Second, notice that the indicator became oversold only two times over a 12-month period. Moreover, these oversold readings did not last long. This is also a testament to underlying strength. Simply becoming oversold is not always a buy signal. It is often prudent to wait for an upturn from oversold levels. In the example above, the green dotted lines show when the indicator crossed back above the 50% threshold. It is also possible that another signal triggered when the indicator dipped below 35% in November.
The S&P 100 is displayed in the bottom pane of the following chart, which displays the S&P 100 Percent Above 50-Day MA ($OEXA50R). Because the OEX was trading below its 150-day SMA, this is an example of a bear market. Overbought conditions were utilized as selling alerts, and oversold conditions were disregarded due to the larger downward trend. The indicator must first become overbought and then fall below the 50% barrier in order for a sell signal to occur. This guarantees that before acting, the indicator has begun to wane. There will still be faulty signals and whipsaws in spite of this filter. On the chart below, three signals are present. The red arrow shows the overbought condition and the red dotted line shows the subsequent move below 50%. The first signal did not work out well, but the other two proved quite timely.
Percent Above SMA – Chart 3
Bullish/Bearish Divergences
Bullish and bearish divergences can produce great signals, but they are also prone to many false signals. The key, as always, is to separate robust signals from ineffective signals. Small divergences can be suspect. These typically form over a relatively short time period with little difference between the peaks or troughs. Small bearish divergences in a strong uptrend are unlikely to foreshadow significant weakness. This is especially true when the divergent peaks exceed 70%. Think about it. Breadth still favors the bulls if more than 70% of stocks are trading above a designated moving average. Similarly, small bullish divergences in strong downtrends are unlikely to foreshadow a major bullish reversal. This is especially true when the divergent troughs form below 30%. Breadth still favors the bears when less than 30% of stocks are trading above a specified moving average. (Larger divergences have a greater chance of success.) Larger refers to the elapsed time and the difference between the two peaks or troughs. A sharp divergence covering two months or longer is more likely to work than a shallow divergence covering 1-2 weeks.
The Nasdaq Composite is displayed in the lower window of the chart below, which displays the Nasdaq Percent Above 50-day MA ($NAA50R). A significant bullish divergence developed between November 2009 and March 2010. The divergence lasted for three months, and the second dip was significantly higher than the first trough (green arrows), despite the fact that the troughs were below 30%. The rise from late May to early June was hinted at by the subsequent move above 50%, which also validated the divergence. Although the indicator went below 50% in early July and a slight bearish divergence formed in May and June, this warning did not portend a prolonged decline. The indicator quickly returned over 50% because the Nasdaq rally was too strong.
Percent Above SMA – Chart 4
The S&P/TSX Percent Above 50-day MA ($TSXA50R) and the TSX Composite ($TSX) are displayed in the following chart. Between the second week of May and the third week of June (four to five weeks), a slight bearish divergence developed. The gap between the highs in early May and mid-June produced a quite sharp divergence, despite the fact that this divergence was relatively brief in terms of time. Although the indicator failed to return above 60% in mid-June, the TSX Composite was able to surpass its May peak. The divergence was created by a substantially lower high and was then validated by a break below 50%.
Percent Above SMA – Chart 5
The Bottom Line
The percentage of stocks above a specific moving average is a breadth indicator that measures the degree of participation. Participation would be deemed relatively weak if the S&P 500 moved above its 50-day moving average and only 40% of stocks were above their 50-day moving average. Conversely, participation would be deemed strong if the S&P 500 moved above its 50-day moving average and 60% or more of its components were also above their 50-day moving average. In addition to absolute levels, chartists can analyze the directional movement of the indicator. Breadth is weakening when the indicator falls and strengthening when the indicator rises. A rising market and falling indicator would raise suspicions of underlying weakness. Similarly, a falling market and rising indicator suggest underlying strength that could foreshadow a bullish reversal. As with all indicators, it is important to confirm or refute findings with other indicators and analysis.
SharpCharts
These indicators can be plotted in the main chart window or as an indication that appears above or below the main window for users of Sharp Charts. The S&P 500 is displayed in the indicator window below, while the S&P 500 Percent of Stocks Above 50-Day MA ($SPXA50R) is displayed in the main chart window. The main window now includes a 50% line (blue) and a 10-day SMA (pink). How to add these as “Overlays” is demonstrated in the figure below the chart. To add the S&P 500 as an indicator, choose “Price” and then type $SPX for “Parameters.” To include a moving average as a “Overlay,” select Advanced Options.
Percent Above SMA – SharpCharts
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