DOWN PRESSURE INDICATOR - NASDAQ 100

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APPLICABLE TIME FRAME(S):  

SHORT / INTERMEDIATE

UPDATE SCHEDULE:

Each weekday night by 7:00 PM EST

EXPLANATION:

This indicator is constructed by observing the daily point moves and volume flow of each component stock in the Nasdaq 100 (NDX).  The indicator in an average of the total point moves that were down points, and the total volume flow that was down volume (i.e. volume in issues that closed lower on the day).  It is probably best explained using an example.

Let's take February 7th, 2003 as an example.  By that point, the market had made a steady decline for nearly a month, and the selling pressure was fairly steady.  The NDX closed lower by around 13 points that day.  When we take a look at the movements of the underlying stocks in that index, we get the following information:

Total points gained by stocks which closed higher that day:  5.50

Total points lost by stocks which closed lower that day:  35.56

Total volume that went into the stocks that closed higher:  67 million shares

Total volume in stocks that declined on the day:  597 million shares

We want to see how much down pressure there was in the Nasdaq 100 on February 7th.  So we take an average of the total points that were down points and the total volume that was down volume:

Down points = down points / (down points + up points)

= 35.56 / (35.56 + 5.50)

= 35.56 / 41.06

= 87%

Down volume = down volume / (down volume + up volume)

= 597 / (597 + 67)

= 597 / 664

= 90%

The Down Pressure indicator for that day was the average of the two:

Down Pressure = (Down point percentage + Down volume percentage) / 2

= (87% + 90%) / 2

= 89%

Therefore, the Down Pressure for February 7th, 2003 was a high 89%. 

Since the day-to-day fluctuations can be extreme, we use a three-day average of the daily readings for posting to the web site.

GUIDELINES:

When the 3-day Down Pressure indicator reaches an extreme, it often marks short-term exhaustion in buying or selling pressure.  We generally use readings under 32% to indicate an excessive amount of buying pressure (particularly when in a longer-term downtrend), and readings above 70% to indicate that the selling may be overdone and due for a rest (especially when in a longer-term uptrend).

Important:  This short-term gauge can often be effectively used as a non-contrary indicator for longer-term moves.  Meaning, when we see an extreme thrust one way or the other, while the market normally takes a few days to correct the move partially, it is often a sign of an important change in the longer-term character of the market.  For instance, when we have been rallying, then see an extremely oversold down pressure reading, it can mean that while we are short-term oversold, there is some momentum to the downside and once we correct the oversold reading, there may be more selling on the way.

The chart below shows six distinct occurrences of the Down Pressure indicator reaching extremes.  When can clearly see that each time the market became overbought, indicated by a Down Pressure reading under 32%, the market had great difficulty sustaining any upward thrust and in fact the NDX dropped every time over the following days. 

Conversely, each time we became severely oversold, indicated by a reading above 70%, the market rebounded or at least there was a few-day letup in the selling pressure.  In the context of such a severe decline, oversold readings are less reliable, and it usually takes a more extreme reading to produce a change in trend (note the August 2002 reading of 90% - more than two standard deviations from the average).

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS peaks when the Down Pressure indicator reaches overbought, or troughs immediately after the indicator reaches 70%.  It is a guideline and not a trading system unto itself.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between 32% and 70%

95% of readings (2 standard deviations) should be between 13% and 89%

99% of readings (3 standard deviations) should be between 0% and 100%

In other words, we should expect a reading under 13% or over 89% approximately 13 times per year.  Since such a reading would be unusual, it suggests that we are seeing an unsustainable trend.  These figures assume a normal distribution curve.

© 2005  Sundial Capital Research, Inc.  All Rights Reserved.