DecisionPoint.com has a unique market indicator that measures very short-term participation of stocks in a given index. The Participation Index (PI) is a dynamic, price-based measure of the percentage of stocks that are literally pushing the short-term price envelope -- not just advancing or declining, but actually meeting or exceeding the edge of the envelope.
Actually, there are two Participation Indexes -- the PI-UP and PI-DOWN. Readings of 60 or greater are generally considered climactic. (Note on the chart below that the PI-DOWN scale is reversed in order to present a more intuitive view.) Climactic readings signal an internal blow-off that will usually result in a period of consolidation, a price reversal, or prices might continue in the direction they were going. Of course we can't be sure of the outcome, but it does serve as a reminder to tighten stops.
Let's look at some of the PI-UP climaxes on the chart. In March the UP climax resulted in several weeks of consolidation, but the one in April, while breaking the consolidation, was followed by a correction within two days. The UP climax at the beginning of May led a three-week advance, and the one in June preceded a correction.
It remains to be seen where the most recent UP climax (last week) will lead. So far, prices are consolidating, which is promising, but Thursday's new price high was accompanied by a lower PI-UP reading (negative divergence), so tight stops are in order.
PI-DOWN climaxes (marked by the black arrows) in a bull market generally tell us that the decline is finished or nearly so.
Summary: The Participation Index identifies short-term buying and selling climaxes, and prods us to tighten stops to prepare for possible price reversals. Because it is based upon price performance, we believe it is somewhat more credible than breadth or volume based indicators.