In sports, it’s called the “Big Mo.”
Momentum. When it comes to the stock market, it’s one of the three pillars of our analysis and forecasting here at EWI. The other two being price patterns and sentiment.
But, for now, let’s focus on momentum.
A measure of momentum is a stock index’s advance / decline line, which is calculated by taking the difference between the number of advancing and declining stocks and adding the result to the previous value. It rises when advances exceed declines and falls when declines exceed advances. An analyst typically compares the advance / decline line plotted for a given index with the performance of the actual index.
As you might imagine, a rising advance / decline line in a bull market supports a continuation of the bull market. The reverse is true in a bear market.
With that in mind, let’s see how EWI’s analysis of the stock market’s momentum helped us to forecast the historic stock market top in 2007.
Here’s a chart and commentary from our October 2007 Elliott Wave Financial Forecast, which published on September 28 of 2007.
While the DJIA has retraced approximately 92 percent of the decline from the July high and the NYSE Composite Index 87 percent, the NYSE advance-decline line has retraced just 42 percent. In other words, the rally is narrow, as the majority of NYSE stocks are underperforming. … Taken as a whole, the majority of stocks are not keeping pace with the push in the major stock indexes, which is bearish behavior.
Just five trading days later, the NYSE Composite Index reached a closing high of 10,247. The index didn’t bottom until March 6, 2009, a decline of 58%.
What does all this have to do with today? The answer is: a lot.
The just-published May Elliott Wave Theorist gives you insights into the stock market’s momentum that would be good for you to know now. The issue looks at the Arms index, usually referred to as TRIN, an indicator that compares advancing and declining stocks and trading volume.
Most important, you get context, and learn what the market’s current momentum indicators mean in the short-term, as well as for the stock market’s big picture.
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