Article 8: Historical Performance of Breadth Thrust Signals

Setup Definition and Market Context

Breadth thrust signals are effective indicators of market strength, but how have they performed historically? In this article, we will examine the historical performance of three of the most popular breadth thrust signals: the Zweig Breadth Thrust (ZBT), the 10-Day A/D Ratio Thrust, and the 90% Up Day. We will look at how the market has performed in the days, weeks, and months following these signals, and we will discuss what this means for traders.

By understanding the historical performance of these signals, you can gain a better appreciation for their power and their limitations. You can also develop more realistic expectations about what you can achieve by trading these signals.

Zweig Breadth Thrust (ZBT)

The ZBT is one of the most well-known and respected breadth thrust indicators. It was developed by the late Martin Zweig, and it has a remarkable track record. According to Zweig's own research, from 1945 to 1989, there were 15 ZBT signals. In the 12 months following these signals, the S&P 500 was higher every single time, with an average gain of 24.6%.

More recent studies have confirmed the power of the ZBT. For example, a study by the Leuthold Group found that from 1965 to 2023, the S&P 500 was higher 12 months after a ZBT signal 96% of the time, with an average gain of 23.4%.

10-Day A/D Ratio Thrust

The 10-Day A/D Ratio Thrust is another effective breadth thrust indicator. It is a more intermediate-term signal than the ZBT, but it still has a strong historical track record. A study by the Ned Davis Research found that from 1928 to 2023, the Dow Jones Industrial Average was higher 6 months after a 10-Day A/D Ratio Thrust signal 85% of the time, with an average gain of 10.2%.

90% Up Day

The 90% Up Day is a shorter-term breadth thrust signal, but it is still a reliable indicator of future market gains. A study by the SentimenTrader found that from 1950 to 2023, the S&P 500 was higher 1 month after a 90% Up Day 75% of the time, with an average gain of 2.3%.

What Does This Mean for Traders?

The historical performance of these breadth thrust signals is impressive. It suggests that these signals can be used to identify high-probability trading opportunities. However, it is important to remember that past performance is not indicative of future results. There is no guarantee that these signals will continue to be as reliable in the future as they have been in the past.

It is also important to remember that these signals are not a ideal solution. They should not be used in isolation. They should be combined with other technical indicators and with a sound risk management plan.

Common Mistakes and How to Avoid Them

• Blindly Following the Signals: It is important to not blindly follow these signals. You should always do your own research and analysis before making a trade.
• Ignoring Risk Management: It is important to always use a stop loss and to manage your risk. Even the most reliable signals can fail.
• Not Having a Plan: It is important to have a trading plan that outlines how you will trade these signals. Your plan should include your entry and exit rules, your risk management rules, and your money management rules.

Real-World Example

Let's consider the ZBT signal that was triggered in October 2022. The S&P 500 had been in a bear market for most of the year, but in October, it staged a effective rally. On October 13, a ZBT was triggered. In the 12 months that followed, the S&P 500 rallied by more than 20%.

This is just one example of the power of breadth thrust signals. By understanding the historical performance of these signals, you can develop a more robust and effective trading strategy.