Trading with Percentage of Stocks Above Moving Average Made Easy

The percentage of stocks trading above a moving average is a market breadth indicator that measures how many stocks in an index or market are trading above a specific moving average level. Market analysts and investors use this metric to assess the overall strength or weakness of the market.

To put this in simpler terms, imagine you are looking at a race where hundreds of runners are competing. If most runners are ahead of a certain checkpoint, it means the majority are moving forward at a strong pace. If only a few have passed the checkpoint, it suggests that the race is slowing down. Similarly, if a large percentage of stocks are trading above a moving average, it signals broad market strength. On the other hand, if only a small percentage are above the moving average, it may indicate weakness or a potential market reversal.

For systematic traders, this indicator is useful because it provides an objective, quantifiable way to measure market conditions. Instead of relying on gut feelings or news headlines, traders can use this data to determine whether market conditions are favorable for their strategies.

This indicator is calculated by taking the count of stocks trading above a specific moving average, dividing it by the total count of stocks in the index, and then multiplying by 100 to express it as a percentage.

Percentage Above MA = (Number of Stocks Above MA / Total Number of Stocks)×100

A trader can apply this calculation to different moving averages, but the most common choices are the 50-day, 100-day, 150-day, and 200-day moving averages.

• The 20-day moving average is often used for very short-term signals.
• The 50-day moving average is typically used to assess short-term momentum. If a high percentage of stocks are above this level, it suggests an uptrend in the market.
• The 100-day, 150-day, and 200-day moving averages are longer-term trend indicators. If most stocks are above these levels, the market is in a strong uptrend, while a low percentage suggests weakness.

Here’s how stock market investors and traders can interpret the indicator:

• If more than 70 percent of stocks in an index are trading above their 50-day or 200-day moving averages, it indicates bullish sentiment, meaning the majority of stocks are in uptrends.
• If the percentage is between 30 and 70 percent, market conditions are neutral, suggesting a mixed or consolidating market.
• If the percentage drops below 30 percent, it is a sign of market weakness, indicating that most stocks are trading below their moving averages and the market may be weak.

The percentage of stocks above the moving average differs from other market breadth indicators such as the breadth oscillator, which tracks momentum based on advancing and declining stocks. It also differs from the advance-decline line, which measures the net number of advancing versus declining stocks.

This indicator is unique because it directly measures the proportion of stocks participating in a trend, making it a useful tool for trend confirmation and trend reversal strategies.

Systematic traders rely on objective, rules-based strategies rather than emotional decision-making. The percentage of stocks above the moving average is a valuable tool for systematic trading because it provides a clear way to assess market selection and conditions.

Why Systematic Traders Use This Indicator

• It removes emotions from market commentary by providing a data-driven measure of market strength.
• It allows traders to backtest different thresholds to determine if the indicator adds an edge to their strategy.
• Based on trend confirmation, it can help traders determine when to increase or reduce their market exposure.

Example of a Systematic Trading Rule Using This Indicator

• If more than 60 percent of the Nasdaq 100 or S&P 500 stocks are above their 50-day moving average, the trader maintains full long exposure.
• If the percentage falls between 40 and 60 percent, the trader reduces exposure to 50 percent.
• If less than 40 percent of stocks are above their 50-day moving average, the trader exits long positions and moves to cash or short trades.

Setting clear rules allows traders to eliminate the unpredictability of bad and ineffective signals, enabling them to base their strategies on historical data.

Lagging Indicator

Since moving averages rely on past price movements, this indicator can be slow to respond to sudden market changes. For example, during a sharp market selloff, stocks may have already fallen significantly before the indicator confirms a bearish trend.

Solution: Traders can use additional indicators, such as Implied Volatility, Oscillator Rate, or 30-Day Historical Volatility, to complement the percentage of stocks above a moving average and provide earlier warning signals.

Overreliance on a Single Moving Average

Different stocks have different characteristics, and a longer-term moving average may not accurately reflect overall market trends.

Solution: To get a broader perspective, consider tracking multiple moving averages—such as the 50-day, 100-day, 150-day, and 200-day moving averages.

Market Regime Changes

In choppy markets, stocks can frequently move above and below their moving averages, creating market noise and false signals.

Solution: Adjust the indicator’s thresholds based on historical backtesting. For instance, in bull markets, traders might use a higher threshold for bullish signals, while in bear markets, they might lower the bearish threshold.

This indicator is most effective in trending markets, where moving averages serve as reliable trend filters. It tends to be less useful in choppy or sideways markets, where stocks frequently cross above and below their moving averages.

Combining with Other Indicators

To improve reliability, traders can combine this indicator with:

• Index trend analysis: If the Nasdaq 100 Percent Above 50-day MA or the S&P 500 is also above its 50-day moving average, it confirms market strength.
• Relative strength comparisons: Comparing the percentage above the moving average across different market benchmarks can help identify which sectors are leading or lagging.

Backtesting for Optimization

Instead of assuming a fixed threshold, traders should backtest different levels to determine what absolute levels historically produced the best signals.

• If the percentage of stocks above the moving average is over 80 percent, the market may be overextended, and traders might reduce risk.
• If the percentage drops below 20 percent, the market may be oversold, but traders should wait for trend confirmation before going long.

The percentage of stocks above the moving average is useful for assessing market strength and identifying potential turning points. It is particularly valuable for systematic traders because it objectively measures market conditions and adjusts trading strategies accordingly.

However, like any indicator, it is most effective when combined with other tools and tested through historical data. Traders who use a rules-based approach and apply this indicator systematically can improve their decision-making and better understand market trends.

The Trader Success System provides a structured approach to developing and testing profitable strategies if you want to build a trading system that removes uncertainty and improves consistency.

Start your journey to systematic trading success today and learn how to apply market breadth indicators effectively in your strategy.