The S&P 500 index comprises 500 of the largest publicly traded stocks in the U.S. On any given day, some stocks within the index will rise, while others will fall. If the majority of stocks are advancing on a bullish day, it suggests bullish confirmation. Conversely, if the majority of stocks are declining, it indicates bearish confirmation. In today's post, I will explore the S&P 500 Advancing-Declining Ratio indicator and how you can leverage it to gain a trading edge.
Plotting Advancing and Declining Stocks on ThinkorSwim
The ThinkorSwim platform enables users to plot the number of advancing stocks in the S&P 500 with the following script:
declare lower;
input length = 1;
def adv = close("$ADVSP");
plot advancing =adv;
Similarly, you can also plot the number of declining stocks in the S&P 500 using this script:
declare lower;
input length = 1;
def decl = close("$DECLSP");
plot declining = decl;
Finally, we can calculate the ratio of advancing to declining stocks using the following script:
declare lower;
input length = 1;
def adv = close("$ADVSP");
def dec = close("$DECLSP");
def ad_ratio = (adv - dec) / (adv + dec);
plot ADRatio_SP500 = ad_ratio;
ADRatio_SP500.AssignValueColor(if ad_ratio > 0.5 then Color.GREEN else if ad_ratio < -0.5 then Color.RED else Color.GRAY);
ADRatio_SP500.SetPaintingStrategy(PaintingStrategy.HISTOGRAM);
ADRatio_SP500.SetLineWeight(3);
Visualizing the S&P 500 Advancing-Declining Ratio Indicator
By adding these three studies to your SPX 5-minute chart, you will achieve a comprehensive visualization of the market's advancing and declining stocks on your ThinkorSwim platform.
SPX, 5 min chart, 5 May, 2023
Analyzing the S&P 500 Advancing-Declining Ratio Indicator
As demonstrated in the chart above, the ratio of advancing to declining S&P 500 stocks remained above 70% throughout today's trading session. Furthermore, the ratio steadily increased alongside the SPX index, ultimately reaching an impressive 88%—one of the highest readings of 2023.
Interpreting the Indicator for Trading Decisions
When the market exhibits a strong upward movement that is supported by the Advancing-Declining Ratio, it is not advisable to short the market. Instead, traders should consider going long on intraday dips if they missed the morning entry point. This strategy capitalizes on the broader market momentum while minimizing the risk associated with shorting a market displaying strong bullish sentiment.
By monitoring the S&P 500 Advancing-Declining Ratio indicator and understanding its implications, traders can better align their strategies with prevailing market conditions and make more informed decisions on their trades.
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