Advance Decline line at Trade10.com

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Advance/Decline line

The advance and decline line is a cumulative, ongoing sum of the difference between the number of stocks closing higher minus the number of stocks closing lower each day. It can be used as a measure of market strength as it moves higher when the there are more advancing issues than declining issues. It moves lower when there are more declining issues than advancing issues. Plotting the Advance/Decline line allows insight into market strength. At times the major U.S. indices can continue higher while we are seeing a drop in the advance/decline line. This is called a divergence and warns that we may be at the end of an upward movement and sets the stage for a possible reversal of price trend. However such divergences can exist over a long period of time before evidence of price trend reversal occur. It becomes a matter of sound analysis to build as wide a body of evidence as possible in forming an outlook for the future path of prices.

The concept of the Advance/Decline line is to have a broad measure of daily changes in supply and demand. Technicians often smooth the data using moving averages of the changes in advancing issues and declining issues in order to get a more accurate picture of changing trends in supply and demand. One of the best known indicators derived from smoothing out the advance/decline data is called the McClellan Oscillator.

The McClellan Oscillator on the graph below is shown plotted with a directional composite indicator. We have found that divergences between the McClellan Oscillator and the directional composite indicator can help identify approaching periods of bullish or bearish market behavior. A divergence of peaks between the indicator and the oscillator indicate a potential for falling markets near term. A divergence of troughs between the indicator indicate a potential for rising markets near term. Below the McClellan Oscillator is a graph on the S&P500 Index to allow a reference for market action after the divergences indicated on the McClellan Oscillator.

A look at other interpretations of the McClellan Oscillator

The McClellan Oscillator can be used as an overbought/oversold indicator. It also has value at predicting short term trend changes when it crosses the zero line. A rising indicator that crosses the zero line from below is a bullish sign. A falling indicator that crosses the zero line from above is a bearish sign.

The McClellan Oscillator is calculated by subtracting a 39 day moving average of advances minus declines, from a 19 day moving average of advances minus declines. Generally it is not considered a forward looking indicator but can tell you a lot about trend.

All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.