When a price trend changes direction, it is sometimes difficult to predict whether that change is just a
small correction or the start of a major trend change. I use a simple indicator, which I call the trend
exhaustion index (TEI), to help interpret such trend changes.
TEI gives an indication of change in market direction. It is not infallible, but after using it for the past
year, I have learned to appreciate it as part of my technical toolbox. It is especially useful in giving exit
signals prior to major market declines.
The index is constructed by dividing the New York Stock Exchange (NYSE) new highs by the NYSE
advances each day and plotting a 10 day exponential moving average of this value. The formula is thus: