Some market indicators consistently lead price movements. Learning to read these leading indicators can help you anticipate market turns before they happen.
Market Breadth Indicators
Breadth measures market participation - how many stocks are participating in a move.
Advance/Decline Line
- Cumulative sum of advancing minus declining stocks
- Should confirm market highs and lows
- Divergence warns of potential reversals
Warning sign: If the S&P 500 makes new highs but the A/D line does not, fewer stocks are participating. This breadth divergence often precedes corrections.
New Highs vs New Lows
- Count of stocks making 52-week highs vs lows
- Healthy rallies have expanding new highs
- New lows expanding during rallies = warning
Volume Indicators
On-Balance Volume (OBV)
- Cumulative volume based on close direction
- Rising OBV with flat price = accumulation
- Falling OBV with flat price = distribution
Up/Down Volume Ratio
- Volume in advancing stocks vs declining stocks
- 90% up days often mark bottoms
- 90% down days can mark capitulation
Sentiment Indicators
VIX (Fear Index)
- High VIX = fear, often near market bottoms
- Low VIX = complacency, potential tops
- Extremes are contrarian signals
Put/Call Ratio
- Ratio of put volume to call volume
- High ratio = bearish sentiment = contrarian bullish
- Low ratio = bullish sentiment = contrarian bearish
Leading Indicator Example
Market makes new high. But:
- A/D line fails to confirm
- New highs declining
- VIX at historic lows
These divergences suggest the rally is weakening despite prices still rising.
Intermarket Indicators
- Bond yields: Rising yields can pressure stocks
- Dollar: Dollar strength affects multinational earnings
- Copper: Industrial demand proxy
- Transports: Should confirm industrial activity
How to Use Leading Indicators
- Look for divergences between indicators and price
- Use multiple indicators for confirmation
- Focus on extreme readings
- Consider the timeframe you are trading
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Summary
Leading indicators like breadth, volume, and sentiment often signal market turns before price confirms. Watch for divergences between these indicators and price action. When multiple leading indicators diverge from price, pay attention - the market may be about to change direction.