I scrolling through Quora recently and came across an interesting response to the question:
When will the stock market crash again?
The answer was: by using an indicator. The indicator in particular has apparently been used by over 70 years and seems to be very effective in timing significant market tops.
It’s called – The cumulative summation of advancing and declining stocks of the NYSE
Historically, the indicator is 100% reliable about predicting stock market tops.
How To Use The Indicator?
You need to chart a line of the indicator against the Dow Jones Industrials. As long as each higher high in the Dow has a corresponded high in the advance/decline index there is no bear market in sight. There can be 10% declines in the index without a signal, but nothing worse.
The beauty of the signal is that it tends to be early in signalling a significant decline.
So what we need to look for is a divergence in the cumulative summation of advancing and declining stocks against the Dow. When the Dow is reaching new highs but less stocks are participating – it doesn’t look good.
However, it can never be so easy in the world of finance. There are suggestions being made that almost as much as 54% of what comprises the NYSE no longer reflects individual stocks, and as such, clouds the effectiveness of the advance/decline line. More on that article here.
You can find the A/D chart at StockCharts.