A New Market Index by Dan Downing
Technicians are always looking for leading indices and indicators. We continually search for tools that will give us some advanced warning of the direction of the Dow Jones Industrial Average (DJIA) or the Options Exchange index (OEX 100). More than a year ago, the research team at my firm, Downing & Associates, and I combined four existing equity indices to make a new index, the mixture index. We have found this new index quite helpful in forecasting the intermediate-term trend of equity markets.
The four indices we use to build the mixture index are the Dow Jones Transportation Average (DJTA), the NASDAQ bank and insurance indices and the New York Stock Exchange Financial Index. We chose these four because they seem to lead the markets up and down in the intermediate term (which we define as an eight-week period). All four of these indices are listed each week in Barron's.
The mixture index can be constructed using daily or weekly prices. The results presented in this article are based on weekly figures. The formula for the mixture index is basically an average of the four indices adjusted to give them somewhat equal weighting.