How To Spot a Market PeakHow to spot market peaks using Advance/Decline ratio (ADR)?
First, look for divergence between the market and the indicator. Rising market index accompanied with declining number of advancing stocks means upcoming drop. Second, look for high readings of the ADR. Values above 3.5-4x to be considered as significant.
I've done some back testing, which showed pretty interesting results. Here they are:
o It is most likely to see ADR higher than 3 during first quarter of the year. Usually that is February or March as it happened in 2010, 2012 and as it seems in the current 2014.
o After the peak in ADR with values > 3.5 the bull market continues 40-70 more days before correction occurs (see 2010, 2012).
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