I respect wild salmon. They fight their whole lives swimming upstream for the life cycle to continue.
But they would make horrible traders.
There is an old adage in trading: Don’t fight the trend.
I know some traders who make a great living as counter-trend traders. But its never really worked for me.
Now, there are several indicators a trader can use to help determine if there is a trend, as well as, gauge how powerful it is.
One that I like to use to help me identify if stocks are topping or bottoming or bottoming out is the New York Stock Exchange advance and decline issues.
NYSE Advance-Decline Daily Chart
This probably looks like gobbledygook to you.
Let me explain how to interpret this indicator and incorporate it into your trading. If you’re an active trader it’s worth learning because I believe it can help you improve your entries and exits, as well as your position sizing.
The NYSE ADD
Roughly 3,000 companies trade on the New York Stock Exchange. These range from ExxonMobil (XOM) to Eli Lilly (PFE). You can also find plenty of smaller companies as well.
I like measures that use the NYSE because it’s got a pretty good basket of stocks. That gives me some confidence that the readings I get are fairly broad-based.
As I mentioned before, the NYSE ADD looks at the number of advancing issues on the day vs the number of declining issues. It’s a pretty basic measurement. Each advancing stock gets a positive mark, and each declining one gets a negative one.
Notice in the chart how the extremes we’ve seen fall within the 3,000 point range.
ADD Daily Chart
I subscribe to the theory that market rallies need broad participation to be sustainable. When you only have a few heavy-hitting stocks or sectors pushing up the indexes, that signals a lack of conviction.
Now, I interpret this indicator by comparing it to the SPY or QQQ. What we’re looking for are signs of divergences or confirmations between them both day to day and intraday.
Let’s take a look at price action comparing the SPY and ADD from the other day.
SPY 5-Minute (top) / ADD 5-Minute (bottom)
There are four areas I want to focus on. First, at the opening 30 minutes, we had the SPY stalling while the ADD ran up to the highs of the day. You can read that divergence two ways: either the market is overextended or the SPY is gathering energy to push higher.
Next, we saw both the SPY and ADD make a low around 10:30 am – 11:00 am. In my book, that’s a confirmation of a temporary turn. Same thing goes for the midday high.
Turning to the close, we get something a bit different. Overall, the NYSE ADD still showed a lot of positive participation. However, all the major indexes finished near their lows of the day.
Here’s how I read the close. We’ve seen chart consolidation the last several days at the current market levels. Sometimes you big caps up. Other days its oil stocks. There’s a lot of rotation going on. Push comes to shove, I will rely on the information from the indexes over the ADD.
Applying It To Trading
Remember, the ADD is only an indicator. I never want to trade based on this alone. It’s a supplement to the other work that I do to find trades.
I’ve found the ADD works best for intraday trading (IE day trades). It provides great information on divergences, which we saw above, especially when you combine it with other indicators.
One place I love using it right now is with trades against the broader market. That includes option trades on the SPY, IWM, and QQQ or using futures contracts if I want more leverage.
However, it also works great for identifying potential market tops and bottoms. Check out how it worked in the recent big bottom.
SPY Daily (top) / ADD Daily (bottom)
I want to draw your attention to the days I circled in yellow. The up day in the market was the highest participation we had seen in weeks. Compare it to the other up days, and you can see what I mean. The number of advancing issues started and ended near the highs.
Up to that point, we hadn’t seen any broad market participation to the upside. That was the first day we’d seen the ADD open near the upper end of the range and close there. With the market rallying almost 10% on the day, that told me big money was covering short positions.
Subsequent days brought the recent market rally that covered a lot of ground.
Taking Advantage of The Quick Trades
Right now, I’m keeping trades short. There’s so much overnight risk, I’d rather stick to ones that follow my strategy and have delivered me consistent profits through the years.
One way to get on board with these is through my LottoX service. You get a live stream of my trades along with text alerts and live training.
Honestly, there’s more than I can cover in a short newsletter, which is why I made this video.