at 09:09 AM EST
I have been asked this question so many times I decided to put it out in this forum.
We started publishing the Pitbull Crash Index in 1993 although I have been using it since 1966. http://www.wwfn.com/crashupdate.html
Up until about 7 years ago it was based on the NYSE and we used to give away a little booklet on its construction and track record which was quite impressive. It never failed to give at least two weeks notice before a crash and while it gave false alarms a few times, never missed a real one.
Here is how it is constructed
We look at price advance or decline for each of 5 days. If price advanced today it would be a +1 if it declined it would be a -1. We sum the 5 day result.
We look at accumulation/ distribution by looking volume at every single tick for the index throughout the day and if buying occurred at the ask price put that volume in the plus column. Logically if the tick buying was at the bid price we put that volume in the negative column.
At the end of the day we add up the two volume columns and the winner gets either a + or a - for the day. That result is also summed over 5 days.
We then add the 5 days cumulative results for price and accumulation/distribution (moneyflow) together which gives us a scale of -10 to +10 for the range....
Our trigger points are +6 points to move from cash to invested, or -6 to move from invested to cash. A -10 indicates a crash imminent.
We used to just track the NYSE but about 10 years ago moved to tracking sectors which allow for market rotation observations.
Many people use the index to time the sectors and move to cash when individual sectors move to a minus 6. We use it get a broad snapshot of market health.
What you will find interesting and indicative is that many times you will see a down day across the board on a price basis, but you will see that the accumulation for the day has been positive indicating stealth buying by the large funds and traders. It works extremely well to forecast future moves that way. Remember, the big boys are buying when the majority of us are selling and visa-versa.
Henry Ford- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Monday 02/04/08
MONDAY EVENING UPDATE at 09:46 PM EST
Today saw a 108 point pullback on the DOW with commensurate declines on all of the major indices. A quick look at volume shows you that all were on very light volume, the best kind of declines....
Last Week I showed you the hidden stealth accumulation that was transpiring on the PCI Pitbull Crash Index and that even as declines were setting in there was a continued exercise of more transactions at the ask price as opposed to the bid price meaning that more traders were willing to step up to the plate and pay more than the minimum to ensure their acquisition of the shares they needed....
Take a look at the right two columns of the PCI this evening. On a day that was down from the get-go, we saw increased and consistent buying across all sectors with only Real Estate and Oil Service still in cash positions. Every other sector has solid 1 and 5 day accumulations by the institutions.
Stock Market Crash Index: http://www.wwfn.com/crashupdate.html
