Sometimes the stock market moves forcefully in one direction, as a sudden surge of money elevates or depresses prices quickly. We can measure when this occurs via a technical tool called a thrust indicator. In general, a thrust indicator will measure market momentum by calculating something like the number of stocks advancing or declining over a period of time relative to the total number of stocks advancing and declining over that same period.
But there are other variations, as well. You can also use volume—or the number of shares traded—to develop a volume thrust indicator. That’s what our featured indicator above does. Specifically, it looks at the NASDAQ Composite Index and calculates the ratio of the 10-day advancing volume to the 10-day declining volume. In other words, it compares how much volume is flowing into stocks increasing in price relative to the volume in stocks that are decreasing in price. This produces the red thrust line on the chart.
Using optimization techniques, we have found that when upside volume in NASDAQ stocks exceeds downside volume by more than 87% over the past ten days, a bullish upside volume thrust signal is generated. Historically, the NASDAQ Composite Index has generated strong returns over the following three months after a bullish upside volume thrust signal.
However, when downside volume overwhelms upside volume by more than roughly 54%, a bearish downside volume thrust signal is triggered. This has happened recently, as evidenced by the most recent sell signal on the chart. Historically, stocks have returned close to zero, on average, during the subsequent three months after a bearish signal like this.
So, the main takeaway from this indicator is that momentum matters for stock market returns. And one way to measure market momentum is to look at how much volume is flowing into advancing and declining stocks over a short period of time. When it becomes heavily lopsided to one side, it’s a sign of shifting momentum. We call this dramatic shifting of momentum a thrust, and if you can get on the right side of a thrust, you can better manage your stock market risk.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.