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Nasdaq Weather Report

The Nasdaq Weather Report is created based on a proprietary formula using the Nasdaq's price and volume movements. The volume especially plays an important part in deriving the weather.

The weather can range from Severe Thunderstorms to Hot And Sunny:

If the Nasdaq experiences an accumulation day (i.e. up on heavier volume than the previous day), then it gets a positive score for the day. The higher the volume and/or the %price movement, the higher the score. An extra bonus is given when the price is up over 2% on above-average volume (using a 50-day exponential average). Negative scores apply similarly on distribution days (down on heavier volume than the previous day).

If the volume is lower than the previous day, then that is usually counted as a non-event and there is no score for the day, unless the volume is 10% above the 50-day exponential average, in which case the score is awarded or penalized a smidgen depending on whether the price went up or down.

Finally, if the Nasdaq closes at a new intermediate 20-day high, then the score is awarded another little bonus. Similarly, it is penalized if it closes at a fresh 20-day low.

All of these daily scores are exponentially averaged over 7 weeks (35 trading days) and those averages are smoothed similar to MACD or Stochastics, creating a fast line and slow line. The weather is determined based on the convergence and divergence between the two lines. The more extreme the divergence, the more extreme the weather (Severe Thunderstorms or Hot And Sunny). As the lines start to converge, the weather gets less severe. When they cross, the weather switches between rainy and clear.

Using this weather concept and applying it to the Nasdaq since 1998, we found that the weather cleared usually within a day or two of when the index bottomed. Similarly, we found that the weather turned rainy at about the times (often before the times) that the indexed peaked.

So you can use the Nasdaq Weather Report to get a handle on the general market conditions and make decisions on how much you should be invested.
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