System Design  |  FEB 1996

The Advance-Decline, New-High, New-Low Market System by D. Meyers

V.14:2 (69-75): The Advance-Decline, New-High, New-Low Market System by Dennis Meyers Try combining popular technical stock market indicators - the advance-decline line, the number of stocks making new highs and the number of stocks making new lows - to develop a trading system for the stock market. The advance-decline line (ADL) has long been acknowledged as a valuable indicator of future market direction. Much of the discussion to date on how to use the ADL has been anecdotal, however. There have been numerous references on how negative divergences between the ADL and the Dow Jones averages (DJ) or negative relative strength between the ADL and DJ have led to substantial market declines. However, none of the studies have presented a rigorous test of their theories over an extended market period or have shown the details of every case that satisfies their buy and sell criteria over an extended market time horizon. The New York Stock Exchange (NYSE) new 52-week highs (NH) and new 52-week lows (NL) have often been cited as valuable indicators of future market action. Since January 1978, the NHs and NLs have been calculated on a 52-week basis. Before then, the NHs and NLs were calculated for a time horizon of anywhere from two and a half months to 14 1 / 2 months. A number of studies have used the NH/(NH+NL) ratio or its averages as a stock market indicator. While these studies have provided valuable indicators, it is possible NHs and NLs represent two distinct investor expectations and would provide more information about the future direction of the stock market if treated separately and not combined. In this article I will create new NH and NL indicators and a new ADL relative strength indicator and test the combination of these new indicators to predict the direction of the Standard & Poor's 500.

by Dennis Meyers, Ph.D.