The chart below illustrates my Breadth-Volume Oscillator from the summer
of 1995 to the present, charted along the S&P 500 for the same period.
I cannot think of a more vivid depiction of an oscillator perfectly tracking the
index. As you follow along with the enlargements below, you
will see some short-term failures too, but they were pretty insignificant.
Let's try to understand in broad terms
what it is measuring. Most of the indicators I use are very simple. The simpler
the better, in my opinion. For example, the VIX indicator is simply the
20-day moving average of the daily VIX, as reported by the CBOE each
evening. The Breadth-Volume Oscillator, on the other hand, is related to the ARMS
indicator, which is complex. While the two indicators are related, in my
opinion the Breadth-Volume Oscillator presents the data in a much more vivid way.
The ARMS indicator is complex because it uses four measurements; advances,
declines, up-volume and down-volume. The formula is
(advances/declines)/(up-volume/down-volume). The Breadth-Volume Oscillator is
based on the cumulative difference between the advances and declines in
relationship to the cumulative difference between the up-volume and the
down-volume. You can see that the Breadth-Volume Oscillator is similar to the
ARMS, but it manipulates the data differently. The following three charts offer
a close-up of the Breadth-Volume Oscillator. Each one covers a different section
of the chart below. Below, buy signals are indicated with green arrows, and sell
signals with green.
|Breadth-Volume Oscillator Long Term Chart
Through Tuesday, August 20 2002
The chart below covers the period from 8/2/95 through 3/31/98. The green arrows
mark buy points and the red arrows signify sells. The first green arrow in
June 1996 points to a new high by the Breath Oscillator, above the previous high
in November 1995. There followed a brief sell signal, which was reversed
just two months later. There were two more buy signals and then a whipsaw sell
signal in late 1997. As you see, there were very few signals given by the indicator,
just two cycles in 2 years.
Through April 1, 1998
The next period, from 4/1/98 until 2/2/2000, contained just
two more signals. The first one in November 1998 just reiterated the buy
signal from the previous chart, in January of that year. Then there was a whipsaw
in the summer of 2000, followed by two sell signals in December 2000. Now
keep in mind that this is long term indicator. Don't expect it to micro-time
the market. As a long term indictor, though, it would have kept us out of trouble
for 5 years and in the market when it was wise to be in.
Through February 1, 2001
Finally, the chart below shows the present time. Notice that after the sell
signals in November and December 2000 you were kept out of the market for a year
and a half, and we have just today gotten the first buy signal. The
vicious decline in the indicator ended just a month ago, in July, and made a new
low on August 6, just last Tuesday. It is now rising, and has climbed above
its recent high. That's how it gives a buy signal, the first in two years and the
second since the buy signal just after the "Asian Contagion." It is abundantly
clear that the 9/11 reaction did not even make a ripple in the indicator. Nor
did the big March 2001 rally.
I have been watching this indicator for the last 2 years. Through that entire
period I have excluded it from my Summary Index, because it wasn't saying
anything. It was only in the last three months, as it accelerated to the
downside, that I could make any sense out of it. This was not a case of trying
to fit the data to the situation. The math has been the same since the beginning.
Through Tuesday, August 20 2002