McClellan Chart In Focus: Fosback Absolute Breadth, An Old Indicator That is Still Useful – By Tom McClellan

 
Fosback absolute breadth indicator

Years ago, market analyst Norm Fosback came up with his 21-day Absolute Breadth Ratio, which looks at the absolute value of the daily Advance-Decline (A-D) difference, and normalizes it by dividing by the sum of Advances plus Declines (A+D).  He also then smoothed those daily numbers with a 21-day simple moving average.  Bigger daily breadth readings, regardless of which direction they are going, are a sign of chaos associated with important price bottoms.  Quietness is a feature of price tops, and shows up as lower readings for this indicator. 

In this way, Fosback’s indicator acts a lot like Welles Wilder’s Average True Range (ATR).  When traders are feeling panicky at bottoms, we tend to see bigger intraday price ranges for the major averages.  Quietness at tops shows up as lower ATR readings, which can be a “tell” that prices are topping. 

This indicator has been zooming up at a rapid pace in May 2019, reflecting the chaos traders are feeling in an environment of trade battles with China, increase impeachment talk, and worries about the inverted yield curve harming the economy.  This type of high reading is indicative of a bottom for prices, although as we saw in November 2018, the bottoming effort associate with such a reading can give way to a further decline, after a rest break.

For now, this indicator is up high enough to say that at least a rest break in the price decline is in order, if not a rebound into an actual new uptrend.  And if that rest break leads to a low Fosback indicator reading again in a few weeks, then we can start to worry about more corrective work to be done later this summer.

Subscribe to Tom McClellan’s free weekly Chart In Focus email.Related Charts

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.