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Another Oversold 10% Trend of Daily A-D

Chart In Focus
January 27, 2022

Back in December 2021, fears about the debut of the Omicron Variant (yes that was just 6 weeks ago) caused a sharp stock market selloff and an oversold condition on a lot of indicators.  I wrote about one of them at this link, and it is worth another look now with this week’s chart.

To review briefly, the 10% Trend of the daily Advance-Decline (A-D) difference is one of the components of calculating the McClellan Oscillator.  See this link.  We still employ the originalist terminology first coined by the late P.N. Haurlan, who introduced the use of exponential moving averages (EMAs) for tracking stock prices in the 1960s.  He referred to each of them by their smoothing constant, in this case 10%, which governs how fast the EMA responds to changes in prices.  Much of the technical analysis world now prefers to refer to them by some number of days of a lookback period, which for the 10% Trend would be 19 trading days, although that is somewhat misleading because the older data do not actually drop out of the calculations.  They just become progressively less relevant.

When the 10% Trend of daily A-D gets down to below -600, it shows an oversold condition for the overall stock market.  It is possible to get a lower reading than this, but that usually takes a Covid Crash or a Fed and crude oil induced selloff like what we saw in December 2018.  The rest of the time, a reading like this is usually enough to mark at least a temporary end to a big selloff. 

To move this 10% Trend downward, the daily A-D number has to be lower than the 10% Trend value from yesterday.  To get it to a deeply oversold reading like this, that takes several days in a short time period of large negative daily breadth readings.  The stock market can only extend itself to the downside for just so long before it exhausts itself, and the -600 level for the 10% Trend appears to be a marker of that type of condition. 

Such an oversold reading on the 10% Trend is really only useful as a short term indication.  For time frames longer than a few days, we need to turn to other indicators, and one good one is the McClellan Summation Index that my parents developed.  It changes each day by the value of the McClellan Oscillator. 

This next chart shows the Ratio-Adjusted Summation Index (RASI), which adjusts the raw A-D data to correct for the changing numbers of issues traded over time.

Ratio-Adjusted Summation Index

The RASI told us back in November that trouble was coming when it failed to climb back up above +500, and gave that message again now in January.  Failing at or below +500 says the rebound effort has not achieved “escape velocity” and that prices are going to have to fall back down again.

The RASI can also help us know when enough of a selloff has happened on a longer time frame, when it gets down to its own version of a nice juicy oversold level.  It is working on doing that now, but better and more permanent bottoms for stock prices tend to occur at much lower RASI levels than the -403 reading we are seeing as of Jan. 26, 2022.  So while we may have a nice juicy short term oversold condition according to the 10% Trend of daily A-D, the RASI is saying that a better and more lasting bottom would be better found if we can see the RASI get to a much lower level than this.

Tom McClellan
Editor, The McClellan Market Report

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Using the 10% Trend By Itself