CTA Volume Analysis & Market Breadth 2 — Questions and Answers
Question 1: The Arms Index (TRIN) is calculated as:
- Advancing volume / Declining volume
- (Advancing issues / Declining issues) / (Advancing volume / Declining volume) (Correct answer)
- Total volume / Price change
- Number of new highs / Number of new lows
Correct answer: (Advancing issues / Declining issues) / (Advancing volume / Declining volume)
TRIN divides the ratio of advancing to declining stocks by the ratio of advancing to declining volume, with readings below 1.0 indicating bullish conditions and above 1.0 bearish.
Question 2: A 'breadth thrust' occurs when:
- A narrow group of stocks drives an index higher
- An extremely high percentage of stocks advance strongly over a short period, signaling a powerful new uptrend (Correct answer)
- The A/D line diverges negatively from price
- Volume declines on consecutive up days
Correct answer: An extremely high percentage of stocks advance strongly over a short period, signaling a powerful new uptrend
A breadth thrust is a rare, powerful bullish signal where advancing stocks overwhelm declining stocks (often 90%+ advancing) in a short window, indicating broad market strength.
Question 3: What does the McClellan Oscillator measure?
- The momentum of a single stock relative to its sector
- A smoothed difference between advancing and declining issues using two exponential moving averages (Correct answer)
- Daily volume relative to the 50-day average
- The ratio of new highs to new lows
Correct answer: A smoothed difference between advancing and declining issues using two exponential moving averages
The McClellan Oscillator applies a 19-day and 39-day EMA to the daily net advance-decline figure, creating a momentum oscillator of market breadth.
Question 4: When the majority of stocks in an index are declining but the index itself is rising, this divergence suggests:
- Strong broad market health
- The rally is narrow and driven by a few large-cap stocks, which is a bearish warning (Correct answer)
- Increased participation from small-cap stocks
- A valid breakout to new highs
Correct answer: The rally is narrow and driven by a few large-cap stocks, which is a bearish warning
A rising index led by only a handful of large-cap stocks while breadth deteriorates is a classic warning sign that the underlying market is weakening beneath the surface.
Question 5: In volume analysis, what does 'accumulation' typically look like on a chart?
- High volume on down days, low volume on up days
- Declining price with increasing volume
- Higher volume on up days and lower volume on down days over a period (Correct answer)
- Equal volume on all days
Correct answer: Higher volume on up days and lower volume on down days over a period
Accumulation is identified by above-average volume on advances and below-average volume on declines, indicating that buyers are absorbing supply and building positions over time.
Question 6: The 'new highs minus new lows' indicator is used to:
- Calculate the P/E ratio of an index
- Gauge the internal strength or weakness of a market by tracking momentum leadership (Correct answer)
- Measure the average daily trading range
- Determine the number of sector rotations in a month
Correct answer: Gauge the internal strength or weakness of a market by tracking momentum leadership
When new 52-week highs significantly outnumber new lows, it confirms broad market strength; a shift toward more new lows signals deteriorating internal market conditions.
CTA Volume Analysis & Market Breadth 2
The Arms Index (TRIN) is calculated as: