V.8:4 (137-138): Plurality by Arthur A. Merrill, C.M.T.

Plurality by Arthur A. Merrill, C.M.T.

Plurality: Now there's an indicator that has been around for at least half a century. Analyst James Alphier claims it was invented by technical analyst pioneer Paul Dysart, who published a piece on the subject at least as early as 1937. Analyst Ralph Rotnem used it early in its history, while in recent years analyst Alan Shaw has found it to be useful and gave it its name.

The plurality index is based on the difference between advances and declines, regardless of sign. If advancing stocks on the New York Stock Exchange number 4,000 and declines number 3,000, the plurality is 1,000. If the reverse were true and declines exceeded advances by 1,000, the plurality would still be 1,000. The index is a moving total, not an average of the plurality of the last 25 days, and it is updated daily.

Alan Shaw uses benchmarks of 6,000 and 12,000. If the index drops below 6,000, a sell warning is signaled. Shaw waits until the index turns back up, at which point the signal becomes a definite sell. If the index rises above 12,000, it gives a buy alert, at which point he waits until the index starts to drop, when it gives a definite buy signal. He reports that since 1981 all the signals have been successful, with two exceptions, in 1985 and 1986. (The 1986 error was quickly corrected.)

The reasoning behind the index is that there is usually complacency at the top of the bull market, but panic at the bottom of a bear market. John McGinley of Technical Trends comments that a bull market dies of exhaustion, with few selling or buying, while at the bottom everybody rushes in to get out at once. Unfortunately, my data bank is limited to weekly, not daily, data.