V.6:10 (385-388): Diagnosing market tops by Thomas Aspray

V.6:10 (385-388): Diagnosing market tops by Thomas Aspray
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Diagnosing market tops by Thomas Aspray

In the June 1988 issue of Stocks & Commodities, I discussed a few of the more than 250 indicators that I use for stock market timing. I applied these indicators to some of the recent stock market bottoms. In this article, I would like to show you how these indicators reacted at several market tops, including charts of the current market. The formulas for these indicators were given in the previous article. Unfortunately, the formula for the McClellan Oscillator was incorrect. The correct formula for the McClellan Oscillator is the difference between a 19-day exponential moving average of the net advance-decline and a 39-day exponential moving average of the net advance-decline.

1986 stock market

The charts in Figure 1 end on October 1,1986. There are two significant tops on this NYSE Composite Index chart. The first occurs in early July 1986 (just after point 3) as the Dow Jones Industrial Average (DJIA) and NYSE declined 10% in about six weeks. The NYSE Composite had made a third higher high at point 3, in the 146 area. As the market was moving higher, the A/D line made three lower peaks at points 1,2 and 3. This bearish divergence was indicated by the slope of lines A on the NYSE Composite and NYSEA/D Line charts.

Just prior to the highs at point 3, the A/D line violated an important support at line B, a very negative indication. The rebound in the A/D line was very weak as it fell well short of the highs at point 2. On the first sharp down day, this key support was violated with a vengeance.

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