What is STIX?
The Short Term Index (STIX) is a technical breadth indicator that shows the exponential moving average (EMA) of advancing stocks relative to declining stocks. It is used to produce overbought and oversold readings for a basket of stocks as a whole, and thus provides information on whether it is generally a good time to buy or sell stocks.
- STIX is a market breadth indicator that takes a moving average of advancing stocks relative to all stocks.
- STIX provides overbought and oversold readings, mainly above 58 and below 42.
- The indicator is not a timing indicator, so its signals are best used in conjunction with other indicators and price action signals that confirm a reversal from the extreme condition.
The Formula for STIX
Advancing stocks = stocks above the prior close.
Declining stock = stocks below the prior close.
How to Calculate the STIX
Using a 21-period EMA is common.
- Record, each day after the close, how many stocks advanced.
- Record, each day after the close, the sum number of advancing stocks plus the number of declining stocks.
- Divide the number in step one by the number in step two.
- Multiply the result by 100.
- Generate at least 21 data points, but preferably more, then calculate the EMA of the data points.
What STIX Tells You
STIX is a short-term oscillator that compares the number of advancing stocks to advancing and declining stocks. The indicator can be calculated on any basket of stocks by selecting the basket, such as stocks within a sector or industry, and then performing the calculation. By default, the indicator is typically applied to the S&P 500 or stocks listed on the New York Stock Exchange (NYSE), providing an outlook for how a wide range of stocks are performing.
The STIX oscillates around the 50 level, generating values over 50 when advancing stocks outnumber declining stocks. The short term trading oscillator produces numbers under 50 when advancers are less than decliners.
The trading range for the STIX hovers generally between 42 and 58. If the STIX shows levels below 42 it indicates that stocks as a whole are in an extremely oversold condition, with levels above 58 denoting extremely overbought market conditions.
STIX is not a timing indicator. It indicates when the price has made a big move in one direction or the other and may be ready for a reversal. When that reversal will come is unknown. Other indicators or monitoring price action may aid in this regard. For example, once the STIX has reached an extreme level, watch for a price action reversal and possibly a stochastic reversal (of a stock index, such as the S&P 500) to help confirm the reversal from the extreme condition before acting.
Example of How to Use STIX
STIX is not commonly available on most charting and trading platforms. This means the indicator must often be calculated by hand.
Watch the STIX indicator for readings that indicate an extreme. Greater than 56 is getting overbought, while over 58 is very overbought.
Under 45 is oversold, while less than 42 is very oversold.
Once the price has reached one of these levels, it is not necessarily the time to act. Watch the price action of the stock indexes to indicate they are turning. For example, if the STIX reaches 40 and the S&P 500 is declining, wait until the STIX starts turning up, the S&P 500 turns up, and potentially another indicator such as a stochastic oscillator starts turning up and crosses its signal line.
If the market is rising into overbought territory, it may continue to rise. Wait for similar confirmation of a downturn before acting.
The Difference Between STIX and the Advance/Decline Line
The Advance/Decline Line is cumulative, plotting the difference between advancing and declining stocks on a daily basis. The indicator is unbounded, since it is cumulative. The STIX is not cumulative; it is an average of recent data points.
Limitations of Using STIX
The Short Term Index provides overbought and oversold levels. Such levels may not always provide practical use. During steep declines the STIX can stay low for extended periods of time while stock prices continue to decline. Similarly, the STIX can stay overbought while stock prices continue to rally for extended periods of time.
For this reason, the indicator is best used in conjunction with other indicators or forms of analysis. For example, waiting for a price action reversal or reversal in an oscillator once an extreme level has been reached on the STIX.
Extreme levels are fairly rare, which means the indicator points out when the price has made a big move. The indicator it is likely of little use on a daily basis when the market isn't moving a lot.