Major Technical Indicators: Tools for Making Summative Market Decisions


In Major Technical Indicators There is a number of momentum indicators that are often used together with contrary opinions and smart money signals, including breadth of market and moving averages.

Breadth of Market

The breadth of market measures the number of stocks that have increased in price on any given day, as well as the number of stocks that have declined on any given day. This technical analysis tool can help explain from a statistical point of view how a major index, such as the S&P 500 Index, lost x-amount of points on a particular day.

There are three ways of constructing an index and tracking its performance, including price weightings, market cap or value weightings, or averaged weightings. Most stock market indices are value weighted, which means that stocks of large cap companies with billions of dollars in market capitalization tend to dominate the playing field.

So, for example, a stock market index can have more issuers with stocks that have appreciated in price and still report a declining overall value at day’s end because a limited number of large caps have experienced falling prices. Such a divergence can be interesting to technical analysts, who often monitor it by examining the advance/decline numbers for all stocks listed on an exchange and included in a particular index.

These advance/decline figures can typically be found in major newspapers and are published each day, indicating which stocks on the New York Stock Exchange have advanced, declined, or remained unchanged. In addition, Barron’s publishes five-day figures for a specific population sample. So when a technical analyst sees that the DJIA has risen for a couple of trading sessions, along with the advance/decline ratio, the usual consensus is that market gains have been broadly based.

Stocks Trading Above their 200-Day Moving Averages

Next, investors surely must have heard technical analysts mention moving averages of certain indices used as supporting arguments when determining an overall trend. More specifically, the 200-day moving averages appear to be among the more popular ones of Major Technical Indicators.

Media General Financial Services usually calculates 200-day moving averages for numerous stocks included in North American indices, which are subsequently used by technical analysts to gauge overall investor sentiment. In very general terms, note that the market is thought of as overbought and potentially subject to a downward correction when more than 80% of stocks included in an index trade above their 200-day moving averages. In contrast, when less than 20% of the stocks trade above their 200-day moving averages, the market is thought of as oversold and potentially subject to a rally or at least a healthy bounce.

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