Zweig Breadth Signal Thrust

October 10, 2015

Technicians have a lot of versions of a “breadth thrust” signal, and the basic idea is that the Advance-Decline numbers suddenly go from not so good to REALLY good in a short amount of time. The late Martin Zweig was one of the first to examine this phenomenon, and he came up with specific criteria for what is now known by technicians as a Zweig Breadth Thrust (ZBT) signal.

Zweig quantified this idea by first calculating a ratio of the number of advances divided by the sum of advances plus declines. In other words, A/(A+D). Then he calculated a 10-day EMA of that ratio, which we would call an 18% Trend according to our preference for the originalist terminology. To get a Zweig Breadth Thrust signal, that ratio needed to go from below 0.40 to above 0.615 in 10 trading days or less. The idea is that when there is such a signal, it is a sign that a rapid surge of money is trying to push its way through the door to get into the market, and that is a sign of continuing liquidity to fuel an uptrend.

I have played around with those thresholds, because they do not tend to produce very many signals. But as I loosened the criteria at either end, I did get more signals, but the quality of those signals went down.

One point to note about this signal is that there were not any of them from 1984 to 2004. 20 years is a really long time to go without any signals for an indicator like this. It should be understood that Zweig did his work on this signal long before that drought period, when the market was arguably operating on different rules of physics, so it is not a fault of Dr. Zweig that his signal went for 20 years without doing anything.

I bring all of this up because we just got another instance of this signal this week, and so that makes it worth examining. The 20-year signal drought ended back in May 2004, a signal that was not so great because there was a significant pullback afterward (see below). But then in 2009 we a great signal since it was followed by many more months of strong upward movement. Another signal came in October 2011, following an ugly decline after the Fed ended QE2. Its effect was so-so, as the pop ended and the market fell back before starting a new uptrend in earnest.