Worden’s T2115 and T2116: More Indicators which are Off the Charts

Update: The line charts I posted yesterday didn’t show the correct highs for these indicators. So I’ve switched to candlestick charts. The difference is that T2116 is not quite at all-time highs yet.

I was just asked to take a look at another Worden indicator, T2116 — Percentage of stocks trading 2 channels below their 40-day moving average:

What with all the sentiment, breadth, volatility measures out of whack and seemingly in uncharted territory thus making their previous reliability skewed, I was wondering if you might comment on another “T” indicator which tracks breadth envelopes (deviations) below the 40 dma. The T2116 measures stocks that trade 2 standard deviations below the 40 dma. Instead of measuring the % (T2108) of stocks below the 40 dma, the T2116 also measures extreme readings although with a different twist. What kind of readings have you got the last couple of days?

I don’t think I’ve ever looked at that indicator before so I had to look up some info on it. Here’s a little bit about the T2116:

Look for the same patterns described in T2115. Keep in mind that with a 40-day moving average, you will probably see more frequent spikes and higher percentages that with a 200-day moving average but this may give a better short-term picture.

T2115 Percentage of stocks trading 2 channels BELOW their 200-day moving average

T2115 points out instances where too many stocks have surged or plummeted at once by showing you what percentage of stocks are trading 2 channels below their 200-day moving average. The channels are envelope channels and each channel represents one standard deviation from the 200-day moving average. To make the count for T2115, a stock must have fallen very far very quickly in recent trading. Peaks in T2115 naturally coincide with lows in the market because if a large number of stocks are trading well below their 200-day moving averages, then the market is going to be down.

To best understand T2115, pull up the chart and plot a comparison graph using the Dow Jones Industrial Average (DJ-30). Set the time frame to weekly and remember to set your scaling to arithmetic when using the T2 indicators compared to a market index for a true picture of volatility. It also helps to pull the upper splitter bar all the way to the bottom of the chart so you can maximize the viewing area of the top window.

Look at the inverse relationship between T2115 and the Dow during the market surge in the second half of 1997. Just after a pullback in the market around April of 1997, the Dow surged from around 6400 to an amazing 8200 points in early August, a 22% increase. The value of T2115 dove from 14 (14% of the market trading below their 200-day averages) to less than 2.

Although you can see this pretty clearly on the chart, you may be asking “So how is this going to help me in the future?” Well, when T2115 spikes up, and assuming the economy is stable, it’s a good indication that there are some good values out there because this also mean that P/E ratios have gone down. Scroll your chart back to 1990 using the history scroll bar at the bottom of the chart. Look at how T2115 spiked up during the pullback in the second half of the year. T2115 peaked as high as 35%, and we haven’t seen a value higher than 14 since. This was just before the Dow took off on its upward run throughout the 1990s.

Note the key point in there — “assuming the economy is stable”. And here’s a chart of T2115 going all the way back to 1986. As you can see this indicator has blown away its old all-time high. Interesting times we’re in!

And here’s T2116:

Comments

  1. Posted by Ezekiel Groot on October 8, 2008 at 2:18 pm

    Whoa! “assuming economy is stable” INDEED! Mike, thanks so much for posting the great info! All of this leads me to ask a question which you or informed readers could take a stab at. We all know that oversold/bought conditions can lead to more of the same. Question: could a further puking of indices result from our current oversold conditions? We’re so conditioned to the proverbial obligatory bounce from extreme levels. Can we quantify this objectively. Any historians – quants – other curious parties out there?

  2. Posted by Nick on October 8, 2008 at 9:10 pm

    Hi Mike,

    In times when everyone seems to be looking for a reliable market breadth indicator, I’d like to remind you one that I’ve been following.

    McClellan Summation NYSE/Nasdaq
    http://stockcharts.com/h-sc/ui?s=$NYSI&p=D&yr=3&mn=0&dy=0&id=p48440518823

    I am new at trading, so I can’t say if it is reliable or not. However, when you first mentioned T2108 was below 20, this indicator was around -600/-700 range, and it did not look oversold (as much as it did back in July’08).
    Charts you post on your blog are from stockcharts.com. If you can see more than 3 years of data, you might want to look at it to see if it captured market crash of 1987 or 2000 well.
    If you see anything worthwhile, please let us know.

    Thanks for being a good support with your comments in this environment.

    Nick.