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The percentage of stocks that trade above their moving average is a popular measure of market sentiment. When a higher number of stocks trade below their moving average, the indicator value decrease and traders consider this as a bullish sign and expect a rally to occur in the coming days.
The moving average ratio is a market indicator; it is the ratio of the percentage of stocks that trade above their 50-day moving average (medium term) to the percentage of stocks that trade above their 150-day moving average (long term).
Buy signals occur when the moving average ratio falls below a threshold. The threshold should be chosen depending on the market you are trading and the periods used to calculate this ratio.
You may use the rules analyzer to simulate or backtest this market indicator and choose the appropriate threshold.
Note that a filter is applied to this composite; the filter instructs the application to consider only stocks that have a 30-bar simple moving average volume higher than 10000 shares.
This filter as well as the periods used to calculate the moving averages could be easily changed.
The item first creates two composites using the "AddComposite" function.
AddComposite("above_50", close > sma(50), _CompAverage);
AddComposite("above_150", close > sma(150), _CompAverage);
It then creates a filter by associating a rule to the "filter" variable:
filter = sma(volume, 30) > 10000;
Finally, a script loops through the above composites and divides the percentage of stocks trading above their 50-day moving average by the percentage of stocks trading above their 150-day moving average.
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