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From a tool that allows me to measure the trend strength of a stock, I wanted to measure the trend strength of the global stock market by creating a composite that averages the trend strength values of all stocks that are included in the U.S. Stock Market. Note that this composite can be applied to any market.
For the trend strength measure I have used the average directional index (ADX) because it is a very popular technical analysis and it provides a very good measure of the trend strength of a security. The ADX is calculated based on the moving average of the price range expansion using a specific lookback period.
To calculate this market composite indicator, I have used a 14-bar period with the Average directional index. The ADX indicator fluctuates between 0 and 100 and therefore the composite indicator that is based on the ADX will also fluctuate between these same levels.
A high value indicates that the average trend strength of the stocks you are analyzing is high and this means that there are more stocks with strength trends than stocks with weak trends. This signal can be interpreted differently by traders. Some will think that this is a bullish/bearish signal and that the overall trend will continue (whether it is up or down trend) and some will believe that that above a certain threshold the trend is likely to revert.
Note that this market composite indicator doesn't provide bullish or bearish signals for the market. It is used to measure the trend strength of the entire stock market.
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