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The A/D-line has entered critical territory that deserves close examination and a close watch in the ensuing trading days. Here’s what the A/D -line is showing for the S&P 500 today and suggesting is quite possible for the markets tomorrow.
The above edited excerpts, and those that follow below, are from an article by Itinerant as posted on SeekingAlpha.com under the original title Will The Stock Market Correct After All? Another Indicator Looking Sickly and which can be read in its entirety HERE.
The A/D Line – An Explanation
In a robust rally, the majority of constituents of an index will contribute to gains. By counting and accumulating the number of advancing and declining stocks on a daily basis this effect can even be measured quite simply. The associated indicator is called “Advance/Decline Line”, or A/D-line.
- A broad advance of this A/D-line has the majority of stocks on an exchange participating causing it to move sharply higher. Such a broad advance is a bullish indicator signaling a “tide that lifts all boats”.
- A narrow advance with only a limited number of stocks participating will cause the A/D-line to move only slightly higher, or even sideways. Such a narrow advance indicates a mixed market that has only selected stocks benefiting.
- The same, only in inverse, is true for declines.
A divergence of market indicators and A/D-lines are often signs of imminent trend reversals and deserve attention when they occur and, in our view, the A/D-line has entered critical territory that deserves a close watch.
The A/D-line For the Past 5 Years
Below is a chart of the A/D-line for the past 5 years. Note that the 50 day moving average has provided support for this line in many cases and, where it failed, the 200 day moving average held strong.
(click to enlarge)
The A/D Line vs. the S&P 500 Over the Past Few Months
The chart below zooms in on the past few months for both the S&P 500 index and the A/D line. The actual index has been going sideways, obviously hitting resistance but neither looking weak nor strong. The A/D line on the other hand has started to look quite sickly indeed and is showing all the signs of being ready to roll over.
(click to enlarge)
…From a technical point of view we note that only a couple of days ago the A/D-line has dropped below the 200 day moving average line after a series of lower highs and lower lows. A weekly and a monthly close below the 200 MDA line is threatening which would add to chart damage in progress. Furthermore, the 50 and 200 day moving average lines have come close, and a crossing of the two lines would be yet another bearish signal.
*http://seekingalpha.com/article/3382945-will-the-stock-market-correct-after-all-another-indicator-looking-sickly?ifp=0
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