Reading Market Direction 1/27/13

It is hard to argue with the market direction when it rips upwards for several days in a row and despite bad news continues to push ahead. But how does one confirm direction earlier before the big part of the move takes hold? I use another method using the T2100 advance/decline line to confirm direction.

The advance/decline line is calculated by subtracting the number of declining stocks for the day from the number of advancing stocks for the day. It is a cumulative indicator meaning that each day’s calculation is added (or subtracted) from the previous day’s indicator value. I use data from Worden Bros T2100 advance/decline line into Metastock

Link to the Worden site for more details of the indicator and some of the verbiage I wrote below is as follows:

http://www.worden.com/legacy/TeleChartHelp/Content/Indicators/Worden_s_Market_Indicators_T2s.htm

"The advance/decline line represents a great improvement over the common one. It is calculated only from NYSE common stocks (omitting preferred stocks, warrants, etc., which have a markedly distorting influence). It is calculated from the percentage of advancing stocks minus the percentage of declining stocks, rather than using raw numbers. For example, if 55% of the NYSE was up today and 30% were down, the net change today would be 25 (55% - 30%). 

When the advance/decline line rises in lock step with a broad average such as the SP-500, it is an indication that a majority of stocks are in agreement with the strength shown by average. This is called "strong breadth." When the advance/decline line and the broad average decline together, breadth is weak. When the two lines disagree, it is called a divergence, and the advance/decline line is more apt to be correct, although it is by no means a certainty."

Charts of the advance/decline line along with the S&P 500 (SPY) show consistent direction upwards. Now the million dollar question is what is next? No one really knows, but after such a strong move, there is likely to be consolidation before the roller coaster keeps going up

The T2100 advance/decline line shows a long signal on 11/28/12 in the chart below

. 
SPY confirms the move up.