Why is the Percentage Above Moving Average Important?
Percentage Above Moving Average is a breadth indicator that measures the internal strength or weakness in the underlying index. This indicator counts the percentage of stocks trading above a particular moving average. The 50-day moving average would be applicable for short-medium term range, whereas 200-day moving could be used for medium-long term range and it is available for Dow Jones, Nasdaq, Nasdaq 100, NYSE, S&P 100, S&P 500 and S&P/TSX Composite.
- The degree of participation in the market could be shown by this indicator. When the majority of stocks trade at above to specific moving average, breadth is said to be strong and it is weak when case is vice versa.
- When the indicator values lies above 50% (Presence of Bullish Bias), it shows that the more than 50% of stocks are trading above to some specific moving average, whereas the indicator values below 50% (Presence of Bearish Bias) signifies that the more than 50% of stocks are trading below to a particular moving average.
- We can look for overbought or oversold levels. These indicators are oscillators that fluctuate between zero and one hundred. With a defined range, the signal can be drawn for overbought levels near the top of the range and oversold levels near the bottom of the range.
- Bullish and bearish divergences can predict a trend change. A bullish divergence occurs when the underlying index moves to a new low and the indicator remains above its prior low. This shows relative strength in the indicator can sometimes indicates a bullish reversal in the index.
If the underlying index makes a higher high and the indicator remains below its prior high, a signal of bearish divergence could occur. Furthermore, this is an indication of relative weakness in the indicator followed by a bearish reversal in the index.
Chart: NYSE Stocks Above 20 Day Simple Moving Average
Source: Wall Street Courier. For Educational Purposes Only.
We can calculate Percent above Moving Average by dividing the number of stocks above their XX-day moving average by the total number of stocks in the underlying index.
Percent above MA = (Number of stocks above XX-day moving average)/ (Total number of stocks in index)