Upside/Downside
Measures of Upside/Downside separate the volumes for rising
markets from those in falling markets. Since volume is independent of price, it
makes a valuable tool for measuring the quality of a price trend.
There are two common measures for Upside/Downside:
- The Upside/Downside Ratio, and
- Upside/Downside Volume Line Index
The Upside/Downside Ratio
Overview
- The Upside/Downside Ratio is calculated by dividing the daily volume of
advancing stocks on a particular exchange by the daily volume of declining
stocks. The NYSE Upside/Downside Ratio, for example, shows the relationship
between rising and falling volume on the New York Stock Exchange.
- A U/D Ratio greater than 1 shows there is more volume with rising price
stocks than with falling price stocks.
Signals
The higher the U/D ratio, the more bullish the signal: high
readings above 4 are considered bullish signals, and low readings below .75 are
considered bearish signals.
Martin Zweig wrote in Winning on Wall Street, "Every bull market
in history, and many good intermediate advances, have been launched with a
buying stampede that included one or more 9-to-1 days" ("9-to-1" refers to a day
were the Upside/Downside Ratio is greater than nine). He goes on to say, "the
9-to-1 up day is a most encouraging sign, and having two of them within a
reasonably short span is very bullish. I call it a "double 9-to-1" when two such
days occur with three months of one another."
Overview
- The Upside/Downside Volume (U/DV) Line is
constructed by keeping a running total for the difference between the daily
volume in advancing and declining issues.
- Since the indicator starts with an arbitrary
number, it is usually wise to choose a relatively large number (five
thousand works well).
- A moving average can be constructed from
weekly and monthly figures and plotted alongside the U/DV line.
Signals
- Normally, the U/DV line will move up and down with the price, and trend
lines drawn on the U/DV and price lines will correspond.
- When the U/DV line doesn't confirm a price move (divergence), a signal
is given for a possible trend reversal. For example, upside volume may fail
to expand to support increased prices.
- Signals are also provided when the U/DV line crosses its moving average.