1% Exponential Moving Average (EMA) of Advance-Declines
by Carl Swenlin

The 1% Exponential Moving Average is an excellent indicator for identifying long-term market tops and bottoms. The 1% refers to the 0.01 exponent used to calculate the average, and it is equivalent to a 200 DMA of the daily advances minus declines divided by the total daily advances plus declines.

This indicator is an adaptation of the Momentum Index created by Stan Weinstein and discussed in his book, Secrets for Profiting in Bull and Bear Markets. Whereas Stan uses a 200-day simple moving average (SMA), I opted to use an 200-day exponential moving average (EMA) because it only requires 2 lines on a spreadsheet versus 200 lines for an SMA, and I like using EMAs because they are weighted toward recent price movement. I also use a ratio-adjusted calculation of the daily advances minus declines. (See Ratio-Adjusted Breadth Calculations.) There is an extensive article in the Glossary area of Decision Point titled "Moving Averages" that deals with the general subject and will explain how to calculate the EMA.

The 1% EMA is a significant momentum indicator. Stan Weinstein suggests that it gives BUY and SELL signals when it crosses the zero line. That is one way to use it, but the problem with that is you miss too much of the move, and you do have to watch out for whipsaw. (We have charts in the Long Term Index Library going back to 1970 on this indicator.)

I find it much more useful to watch where it tops and bottoms. For example, in 1990, when the Dow made two successive new highs, the 1% EMA was topping BELOW the zero line. The 1990 Bear Market followed immediately after the second top. Again in late 1994, as the Dow was putting in a double top, this indicator was topping below the zero line. The market subsequently went to its final low prior to the monster rally of 1995.

Which leads us to the significance of bottoms on this indicator. When you see it bottoming in the area of -100 to -150, chances are that the market is putting in a major low. This happened in late 1994, late 1990, late 1987, and mid 1984. The 1% EMA bottom in 1981 did not lead to a major rally, but it was followed in 1982 by two more higher 1% EMA bottoms corresponding with two lower market lows, the final low being in August 1982. We all know where this massive positive divergence sent the market.

How to Calculate Moving Averages