A count of component issues trading above a specified
moving average expressed as a percentage.
This is one of the most important indicators for
measuring participation. The 200-day moving average is a long-term
smoothing of price movement, and a stock's price in relation to this
moving average is a good indication of its long-term trend. For example,
when the price index moves below the 200-day moving average, we can
assume the long-term trend is down until the price index moves back
above the 200-day moving average.
There are no automatic assumptions that can be made about this index.
For example, just because 80% of stocks are above their 200-day moving
average, there is no guarantee that a downside reversal can't happen. In
fact, once the index has moved to an extreme end of its range, it's a
good idea to be alert for a change in direction, because the market
improves until it is as good as it can get, then it starts to
deteriorate. Conversely, as soon as things are as bad as they can get,
they start improving.
The percentage of component issues above their 200
day moving average is considered a reliable indicator of long term
movement in the securities market. When above 70% and subsequently
declining below 70% it is considered to mean that the long term
direction of the market has turned bearish. Vice-versa, when below 30%
and subsequently rising above 30% a bullish indication is given.
The most important aspect of this indicator is the trend. When the
market is trending upward this index should be also be trending up. A
trend divergence indicates that fewer and fewer stocks are in sync with
the price trend and that a price reversal is likely.
The shorter term moving averages provide remarkable
insight into the shorter term internal strength or weakness of the index
or ETF. Developing and deteriorating trends may be detected very early.