This is a proprietary indicator developed by researchers at PowerStocks Labs, that tracks rate of change price momentum of the JSE ALSH index. It joins the Coppock/Trendex Curve as the only other non-breadth related index we track at PowerStocks (both these use ALSH daily price closes to determine their values as opposed to underlying advance/decline data.)

The short name we use for this index is PMI. This indicator is the 2nd module to join our PeakFinder timing system, which also uses the Absolute Breadth Index. PeakFinder-I which has just come out of development, follows on from our highly popular TroughFinder-II and its purpose is to detect major and medium sized peaks/tops in the JSE to warn of impending corrections and to allow our subscribers to use it as a trade-exit tool to complement all our other timing systems.

FUNCTION
PMI is a long-term exponential moving average of a short term ALSH rate-of-change. PMI is quite a powerful and ambidextrous indicator. It serves multiple purposes, namely as:

1. A risk-reduction tool by signifying JSE overbought (risky) and oversold (safe) periods,
2. Indicate general short/medium term predicted direction of the JSE,
3. Categorize the JSE into bear-market, undecided and bull market phases,
4. Act as a trading timing oscillator for a medium term mechanical investment strategy
5. Mark out major troughs and peaks not detected by the Absolute Breadth Index (ABI)
6. To confirm troughs and peaks detected by the ABI
7. Portray bullish and bearish divergence to warn of impending market changes.

CALIBRATION
PMI has been calibrated on the JSE going back 32 years to 1977. The last 12 years of more recent history are shown below: (click on image for much larger version)



Bull market periods are signified by the PMI being above zero and medium term contractions/bear markets are signified by the PMI spending time in negative territory. As you can see, if you used zero crossovers to mechanically generate BUY/SELL signals there would have been very few whipsaws and you would have done quite nicely. If you used zero crossovers for your BUY/SELL signals and also a 20-day moving average crossover in the OVERBOUGHT areas for your SELL signals you would have done even better.

One rare and useful characteristic of PMI is that when it visits extreme areas (either overbought or oversold), then it seems to accelerate in the same direction before turning sharply in the reverse direction to signal a peak or trough. PMI registered 15 troughs and 20 peaks in the last 12 years and this quick reversal feature is very useful for pinpointing exact market turning points to within 2-3 days. We use PMI to confirm peaks signalled by the Absolute Breadth Index (ABI) but on quite a few occasions PMI detects peaks not detected by ABI. PeakFinder-I thus uses both the ABI and PMI for generating peak signals.

When PMI is pointing and trending up then that is the general trend of the market and vice versa for 90% of the time. However when divergence occurs (ie PMI going down but JSE keeps going up or vice versa) then that is a warning sign that a big change is just around the corner. If you squint closely at the above chart you will see the bearish divergences shown with little red lines sloping down and bullish divergences as green lines sloping up. PMI divergences are rare and bullish divergence is even rarer than bearish divergence, but when it occurs you need to sit up and take notice. Not how the two bearish divergences were warning us to get the hell out of the markets before the great 2008 crash.

CONCLUSION
PMI is published in the daily JBAR reports under chart set #8b. A sample is shown below. As usual we will use our unique disparity indexes to monitor for divergences and alert our subscribers on HeadsUP! or WJP. When PMTO reaches extreme levels, these events together with the reversal points are also posted to HeadsUP! as in the orange zones below.

 
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