Developed by Donald Dorsey, the Mass Index is an indicator that identifies trend reversals, and here, MoneyShow’s Tom Aspray explains how it helps him in his analysis.
The majority of technical tools that I use in my analysis and discuss in my trading lessons are ones that I have used for decades or are strategies that have evolved over the years. I was fortunate in the early 1980s to have access to CompuTrac, which included the majority of today’s most frequently used technical indicators.
I do continue to do additional research and came across a technical tool that, I think, investors as well as traders should consider adding to their arsenal of market-timing indicators.
It is called the Mass Index, which first appeared in the June ‘92 Technical Analysis of Stocks & Commodities article “The Mass Index”, by Donald Dorsey. As he said in the article "Range oscillation, not often covered by students of technical analysis, delves into repetitive market patterns during which the daily trading range narrows and widens. Examining this pattern, Donald Dorsey explains, allows the technician to forecast market reversals that other indicators may miss.” Dorsey proposes the use of range oscillators in his Mass index.
Essentially, it measures the narrowing and widening of the range between the high and low prices. The signals do not tell you the direction of the trend change but that is when I rely on other tools such as the NYSE Advance/Decline and the on balance volume.
To calculate the Mass Index:
Calculate a nine-day exponential moving average (EMA) of the difference between the high and low prices. Calculate a nine-day exponential moving average of the moving average calculated in Step 1. Divide the moving average calculated in Step 1 by the moving average calculated in Step 2. Total the values in Step 3 for the number of periods in the Mass Index (e.g., 25 days).Best Freight Companies To Invest In 2015
In my research I found the Mass Index to be most useful on the weekly data. On the weekly chart of the S&P 500, the Mass Index is in blue and there are two horizontal lines, one at 27 (in red) and the other at 26.5 (in green).The chart covers the period from the early part of 2006 until early in 2010.
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Mr. Dorsey looked for what he called “bulges” which was when the Mass Index moves above the 27 level. The first example occurred on August 7, 2007, (line 1), which was two weeks after the July stock market high as the first hints of the mortgage crisis resulted in a wave of selling. Two weeks later, the S&P 500 formed a panic low on August 16.
The Mass Index dropped back below the 27 level at the end of September but did not drop below the 26.50 level, which would have signaled a change in trend. A second bulge occurred the week ending November 16 (line 2) as the Mass Index stayed above 27 until the middle of December.
NEXT PAGE: Examples of the Mass Index in Action
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