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Posts: 1,054
Reply with quote  #1 

The Russell Company generates three major indices representing the 4000 largest cap US Operating Companies Only (OCO) traded on the US exchanges (NYSE, NASDAQ, AMEX).  The three indices are:


1) Russell 1000 (RUI)

2) Russell 2000 (RUT)

3) Russell MicroCap Index (2000 issues; 1000 of the issues overlapped in RUT)


The Russell index membership qualifications are more rigorous than one would expect, i.e. no pink sheets, bulletin board issues, etc.


Since the Russell 2000 and MicroCap indices have an overlap of 1000 issues, the smallest 1000 issues of the Russell 2000 members and the 1000 largest cap issues of the Russell MicroCap index, the 4000 individual stocks comprising the three Russell indices have been divided into quartiles for this study, each quartile consisting of approximately 1000 stocks categorized according to capitalization.


The definitions of each quartile:


1) Tier 1: the Russell 1000 components (RUI)

2) Tier 2: the 1000 largest cap members of the Russell 2000 (RUT)

3) Tier 3: the 1000 smallest cap members of RUT, or conversely, the 1000 largest cap members of the Russell MicroCap index

4) Tier 4: the smallest 1000 cap members of the Russell MicroCap index, referred to as the "NanoCap" index.


This thread investigates the current configurations of the cumulative Advance-Decline (AD) lines, the Up-Down (UD) volume lines, and $Weighted Up-Down ($UD) volume lines of each tier in hopes of identifying what tiers have the strongest, and weakest, money inflows.


First the AD lines of each tier, beginning with the largest cap tier 1 Russell 1000.  The largest 1000 US cap stocks' AD line has confirmed the new highs of RUI price, and is currently resting upon its 5% trend (39 day EMA).  A breach of more than a few days of the RUI AD line 5% trend would be a warning the price behavior is more than a consolidation.  Note the RUI AD line respected the multi-month black dashed resistance line.



The Tier 2 cumulative AD line is struggling to remain above its 5% trend as well as its multi-month support trend line.  Note the Tier 2 cumulative AD line has not exceeded its April 2006 high suggesting money flows as measured by the AD lines have been more selective since the summer 2006 price lows.



The Tier 3 cumulative AD line is actually showing superior relative strength over the Tier 2 group of stocks in the short term, but is also continuing its lower highs pattern evident over the past couple of years.  The Tier 3 AD line has formed a flag/pennant pattern of late.... continuation or topping?


The Tier 4, or NanoCap cumulative AD line is reminiscent of the NASDAQ AD line.  Over the past three years, the Nano AD line's definition of strength is moving laterally instead of trending lower. This smallest group of US OCO issues has many constituents that are very thinly traded and 5% to 10% of this group may not even trade on a given day.


However, this group of stocks does have a tendency of attracting money inflows as will be illustrated using other measures of liquidity.



The UD volume line of the Tier 1 largest cap stocks has diverged from the RUI price over the past couple of weeks evident by its range bound behavior.  Like its AD line, it ran into resistance (black dashed line), but its 5% trend continues to attract buyers.



The Tier 2 UD volume line confirmed the nominal new RUT price highs.  Could the Tier 2 UD line be forming a longer term reverse head and shoulders pattern with its recent consolidation... or is it forming a top along with price?  At least thus far, this indicator is not blatantly diverging from price.



The Tier 3 UD volume line is exhibiting some superior relative strength over the Tier 1 and Tier 2 groups by finding support at its 10% trend (19 day EMA) and grinding higher while the two larger cap tiers' UD lines are in the consolidation mode.



The Tier 4 (NanoCap) UD volume line is exhibiting exceptional relative strength indicating that the advancing issues of these smallest cap US OCO members are attracting significant money inflows.



Another variant of tier volume is the $Weighted UD ($UD) volume indicator which multiplies each issue's closing price by its corresponding volume.  The approach assigns less weight to very low priced-high volume issues which have a tendency of skewing the traditional UD volume indicators.


The Tier 1 (RUI) $UD volume line is basically a shadow of its traditional UD volume line, although in the very short term, is exhibiting slightly superior relative strength over its traditional UD volume line.



Tier 2 $UD volume line, unlike its traditional UD volume line, is grinding out nominally higher highs over the past couple of weeks... an aberration or positive divergence?



The Tier 3 $UD volume line continues to slug out higher highs and higher lows over the past couple of weeks, unlike its higher cap cousins.



The Tier 4 (NanoCap) $UD volume line continues to rocket higher and this smallest cap group apparently didn't receive the e-mail stating money inflows into the group's advancing stocks are supposed to be muted.  However, looking at the Tier 4 $UD line behavior over the past three years, suggests the indicator has continued higher while prices were topping in a couple of examples, so one cannot definitively conclude the current robust strength of this indicator is promising "all clear" ahead.



As long as the topic of volume lines is under discussion, here are a couple of charts taking a look at the Price-Change-Volume (PCV) for the SPX and RUI. PCV is calculated by multiplying each index component's daily price change by it corresponding volume.  The indicators illustrated in the following two charts takes PCV to another level.


These indicators are derived by determining the theoretical PCV high, low, and close for each index component, then apply the Chaiken Money Flow recipe the total High-Low-Close (HLC) PCV numbers for every component.


First is the SPX HLC PCV indicator.  This tool is most effective for identifying price tops and has been diverging in a big way from price over the past few weeks and is a warning sign that should get one's attention. The HLC-PCV tool for the SPX has violated its 5% trend once, and is struggling to remain above it.  Normally, the downside price action gets serious once this tool falls below it 5% trends and remains there for a few days... which hasn't happened "yet".



The last chart is the Russell 1000 (RUI) HLC PCV money flow line, sending the same message as the SPX version. 


I have tried this approach on the smaller cap indices, but they do not provide they do not give the nice divergences at price tops as do the larger caps.



In summary, money flows as measured by volume lines are suggesting the smallest cap issues remain a magnet for positive money inflows while the larger cap issues are in a consolidative phase at best, or a topping process at worst for the bulls.  However, the smaller cap issues attracting the money flows are becoming more selective as illustrated by their respective AD lines.


One likes to see the "troops" (small caps) remain strong while the "generals" (large caps) are consolidating, but in the end, the big money flows into the large caps, thus any price declines from here in the larger caps will likely pull the small caps with them.






Posts: 4,899
Reply with quote  #2 
However, the smaller cap issues attracting the money flows are becoming more selective as illustrated by their respective AD lines.

One likes to see the "troops" (small caps) remain strong while the "generals" (large caps) are consolidating, but in the end, the big money flows into the large caps, thus any price declines from here in the larger caps will likely pull the small caps with them.

Agreed...definitely a manifestation of index weighting going on here based on the data provided, and what we may be looking at are the first real cracks surfacing in the overall equity bull market from the 2002 lows.

Nice work Randy, thanks for taking the time in putting it together.


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Posts: 356
Reply with quote  #3 

Is it time yet to daytrade pennies for a daily double, as the Dow moves towards 13K and distribution continues? Excellent work as usual. (I like to state the obvious.)



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