Above the 50 (AT50) Replaces Above the 40 (AT40)
I had a long and rewarding journey using AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMA), as my key measure of market breadth. Over this time Worden and its TC2000 platform gradually reduced support for the FreeStockCharts platform that I use for tracking and downloading AT40 data. I worked around increasingly restrictive conditions, but with this post I end those efforts. Now I introduce readers to Above the 50 or AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, as my key measure of market breadth.
This change does not disrupt my posts or my analysis of the stock market and its extremes. In fact, my ability to report on market breadth greatly improves. I created a simple conversion of the AT40-based definitions of overbought and oversold to interpret AT50. All my past analyses of overbought and oversold conditions still apply. Regular readers will notice that the new thresholds are very close to the AT40 thresholds.
- Above the 50, AT50, is overbought above 72%
- Above the 50, AT50, is oversold below 21%
TraderView.com provides free and easy access to AT50 with the symbol MMFI. Readers no longer need to wait for updates from One-Twenty Two on market breadth to get the latest values. Going forward, I will use candlestick charts like the one below to display the market breadth information from AT50 (MMFI):
The Technicals of Converting from AT40 to AT50
Converting from AT40 to AT50 is relatively straightforward because the two measures are closely correlated. A good friend provided historical information for MMFI going back to December 5, 2013. While I have AT40 data going back to 1987, eight years of the latest data are sufficient for this overbought/oversold conversion.
Each blue dot above represents a single day with AT50 mapped versus AT40. The correlation between AT50 and AT40 are highest at the extremes and worst in the middle. These relationships make sense because the extremes of market breadth provide the most information (overbought and oversold). The overall correlation in the chart above equals 0.95 which produces a very good linear approximation of AT50 vs AT40. The equation shown in the chart comes from the black diagonal trend line.
The linear approximation of the above scatter plot provides the new threshold values. AT50 overbought = ([AT40 Overbought = 70] – .0706) / 0.9712 = 72%. AT50 oversold = ([AT40 Oversold = 20] – .0706) / 0.9712 = 21%.
The Precision of the New Overbought and Oversold Thresholds
I examined the precision of the new overbought and oversold thresholds to add a layer of reassurance that this conversion makes sense.
Over the historical data, the minimum value for AT50 for any AT40 overbought period was 59%. Accordingly, capturing any and all AT40 overbought periods, triggers the overbought trading rules at an AT50 of 59%. This conservative approach to eliminating false negatives for overbought provides 100% recall but poor precision. Similarly, the maximum possible value for AT50 for any AT40 oversold period was 28%. Within these bounds I created the “odds” that AT40 is overbought or oversold for any given AT50 value. The odds simply represent the share of all AT40 points in the overbought or oversold region for a given value of AT50.
Accordingly, the graphs below “bin” AT50 in increments of 1 percentage point. For example, “21%” represents all values from 21% to 22%, excluding 22%.
The green bars represent the new AT50 definitions for overbought and oversold. For overbought periods, AT50 at 72% marks the odds where AT40 overbought first climbs over above 50%. Similarly, for oversold periods, AT50 at 21% indicates the odds where AT40 oversold first crosses 50%. These markers adequately balance precision with recall and provide to me added comfort with the AT50 thresholds. (Note I removed the data labels for 100% for chart clarity).
How to Use Above the 50
The AT50 overbought and oversold thresholds allow me to use all my AT40 analyses and relationships. Thus, this transition to AT50 should deliver benefits for everyone. I no longer depend on an aging and near deprecated technical platform. Moreover, readers get additional ease of use. Most importantly, the implications of overbought and oversold trading conditions remain the same as always.
Be careful out there!