Jon, the article does not do a good job of describing the arms indicator. It is calculated by (A/D)/(Va/Vd), where A= the number of advancing stocks, D=number of declining stocks, Va and Vd are the advancing and declining volumes. This ratio becomes higher as declining volume swamps advancing volume. Also, it becomes higher as, even while declining volume is large, some stocks are still advancing.
Historically, it has been observed that when the ten day moving average of this indicator is above 1.5, the market has found a bottom within a period no longer than 20 days. We have had two such signals this year, one in march, and another one in august. Last friday was 21 days from the august signal....so, even if Friday was a bottom for the Dow, we have exceeded the historical time period by one day (and friday may well not have been a bottom, of course.)
Another signal from this indicator is two days above 2.0, as you mention. We got this signal a week ago, thursday and friday.
On top of that, the current nyse ten day moving average arms indicator is 1.49, just slightly below a third signal this year....which has never happened in the last 40 years.
How does one validate an indicator? I guess first you look at the equation...no doubt, this indicator will measure the relative amount of selling, and also measure when that selling starts to fail to push prices down. Also, you look at the history of indicator...is there a level that will predict a market bottom consistently? This indicator has one of the best records, having never failed, in the last 40 years, to correctly signal a bottom.
This occassion seems to be more extreme than others, perhaps because our valuations were so extreme, and, at least for the tech stocks, the economic correction has been equally extreme. It would seem that eventually this indicator will be correct, in this case....but it may take longer after the signal to find a bottom, and the signal may get more extreme than in past events (eg a triple signal, and a 10 day signal followed by the two days over 2 signal).
Friday, the vix indicator moved substantially out of its channel, which would also signal a near term bottom, I believe.
On the other hand, it is still really hard to see how we will be able to get some good news that will give this market a reason to rise.
Robin |
