If you are a swing or position trader, you should definitely consider adding the S&P500 Advance-Decline Percent index in your trader’s toolbox. This great indicator can provide both bullish and bearish signals and keep you on the right side of the trade.
In a nutshell, the S&P 500 AD Percent index ($SPXADP) is calculated as advances less declines divided by total issues. For example, if 300 S&P 500 stocks advance and 200 decline, AD Percent would be +20% ((300 – 200)/500) = +100/500 = +.20 or +20%). This number is positive where there are more advances than declines, and negative when there are more declines. AD Percent is a breadth indicator that measures the degree of participation behind a price move.
When I try to see the bigger picture, I would usually create a 100dMA version of the SPXADP and chart it against the underlying S&P500 index. Here’s the chart of the SPX as well as the derivative of the S&P500 advance-decline percent index.
Although there are different ways one can use this breadth indicator, I would like to discuss two specific use cases in this post: 1) identifying unusual bullish thrusts, and 2) spotting bearish divergencies.
Unusual Bullish Thrusts
Over the years, I noticed that the market usually experiences a significant bullish thrust before eventually starting a big move higher. There are several important conditions for a bullish thrust: 1) it should begin from the ‘oversold’ levels, 2) it should move from the ‘oversold’ to ‘overbought’ levels in a matter of several months. The chart below depicts all of the unusual thrusts since 2010.
As you can see, the market experienced 5 bullish thrusts since 2010. The last one started in late December 2018 when the market was extremely oversold and peaked in June 2019 hitting the most ‘overbought’ condition since 2010!
The S&P500 ADP breadth indicator can also provide bearish signals. Those are usually created when the market makes new highs and those highs are not confined by the SPXADP. See the same chart with two major bearish signals during the last 9 years.
The S&P500 Advance-Decline percent index is a great breadth indicator that can provide actionable bullish and bearish signals. The last signal that this indicator provided was a bullish thrust which started in Dec’18 and peaked in June’19. If history is any indication, we should see higher prices going forward.
Still remember, this market can turn on a dime after a tweet or two 😉