Measures of Upside/Downside separate the volumes for rising markets from those in falling markets. Since volume is independent of price, it makes a valuable tool for measuring the quality of a price trend.
There are two common measures for Upside/Downside:
- The Upside/Downside Ratio, and
- Upside/Downside Volume Line Index
- The Upside/Downside Ratio is calculated by dividing the daily volume of advancing stocks on a particular exchange by the daily volume of declining stocks. The NYSE Upside/Downside Ratio, for example, shows the relationship between rising and falling volume on the New York Stock Exchange.
- A U/D Ratio greater than 1 shows there is more volume with rising price stocks than with falling price stocks.
The higher the U/D ratio, the more bullish the signal: high readings above 4 are considered bullish signals, and low readings below .75 are considered bearish signals.
Martin Zweig wrote in Winning on Wall Street, "Every bull market in history, and many good intermediate advances, have been launched with a buying stampede that included one or more 9-to-1 days" ("9-to-1" refers to a day were the Upside/Downside Ratio is greater than nine). He goes on to say, "the 9-to-1 up day is a most encouraging sign, and having two of them within a reasonably short span is very bullish. I call it a "double 9-to-1" when two such days occur with three months of one another."
- The Upside/Downside Volume (U/DV) Line is constructed by keeping a running total for the difference between the daily volume in advancing and declining issues.
- Since the indicator starts with an arbitrary number, it is usually wise to choose a relatively large number (five thousand works well).
- A moving average can be constructed from weekly and monthly figures and plotted alongside the U/DV line.
- Normally, the U/DV line will move up and down with the price, and trend lines drawn on the U/DV and price lines will correspond.
- When the U/DV line doesn't confirm a price move (divergence), a signal is given for a possible trend reversal. For example, upside volume may fail to expand to support increased prices.
- Signals are also provided when the U/DV line crosses its moving average.