Here is a long-term market perspective: 100 Years of Bull-Bear Market Cycles
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Hate to keep beating a dead horse, but I'm still mulling the A-D Line disparity. Here is a chart modeled after cross-currents.net . This chart users.intermediatn.net
, however, totals breadth data from all three exchanges (AMEX, NYSE, NASDAQ) and compares them to the Wilshire Index.
One may presume that in the 1992-1998 bull-market period, the A-D Line should have shown an upward bias (like the NewHigh-NewLow Line). But the most extreme divergence has occurred following the October, 1998, correction. I do not predict a crash based on this chart, but suspect the small select group with parabolic charts (which have artificially inflated the indices) will see a return to more sensible valuations while the money flows into the large number of oversold issues. The A-D line will therefore reverse course while the indices (esp. NAZ) decline.
Unfortunately, I have no data prior to 1992, but would be interested in seeing other historical divergences of an Index vs its Advance-Decline Line.
Several of the other breadth charts can still be seen here (click labels at bottom of page). users.intermediatn.net The Momentum sheet shows several variations of advance-decline numbers and volumes.
For those interested in the A-D Line, here are a few excerpts from S&C:
Stocks & Commodities V. 6:6 (227-231): NYSE technical indicators: diagnosing market bottoms by Thomas Aspray
The NYSE Advance/Decline line represents the cumulative difference between advancing and declining prices. Besides watching for breaks through trendlines or support/resistance levels, divergence from the price movement is also important. Often you will see the A/D line move above its previous highs or below its previous lows, and prices generally follow.
Stocks & Commodities V. 6:9 (354-355): Advance-decline divergence as an oscillator by Arthur A. Merrill
Which indicators signaled the crash last October? One that had been shouting a warning was A-D Divergence. This is one of our most venerable indicators.
A-D, advance minus decline, was first suggested by Col. Leonard Ayers of the Cleveland Trust Company in 1926. He was searching for a way to locate buying and selling climaxes. The indicator is a simple cumulation of the difference between the number of stocks advancing or declining in a day. This indicator usually is coincident with the market, but tends to lag behind a buying or selling climax.
Stocks & Commodities V. 11:7 (273-276): The Real Advance Decline Line by Frank Barbera Jr., C.M.T.
For many years, the daily advance-decline (A-D) line has been among the most widely quoted of market indicators . Many market analysts believe the daily A-D line provides one of the most accurate reflections of the market's near-term technical health. In its most common form, the indicator is constructed by taking the net difference of advances over declines for each day and then plotting a running total of these differences. The resulting cumulative flow line can be used as a yardstick by comparing it with the behavior of the market averages in order to determine whether the majority of
stocks is fully participating in a given advance or decline.
Generally speaking, new highs in the market averages that are confirmed by new highs in the A-D line suggest a technically healthy market, while markets advancing to new highs without A-D line confirmation are considered to be more vulnerable to a significant decline. This form of divergence analysis can help discern market turning points, particularly market tops.
Stocks & Commodities V. 8:7 (274-278): Defining Advance/Decline Indicators by Fay H. Dworkin, Ph.D.
The notion is simple. When fewer and fewer issues participate in the upward trend of a primary bull market, "bad breadth" warns of a market turnaround. Although it is easy to track advancing and declining issues, it's not as easy to know what to do with the data afterward. I have encountered an astonishingly large number of ways to construct "advance/decline" (A/D) indicators. From one period to the next, the closing price of a traded vehicle can advance, decline or remain unchanged. These three outcomes are the basic components of A/D indicators. Does the similarity end there? Which indicator does the best job?
By themselves, the numbers of advancing and declining issues have limited interpretive value. In a bull market, loss of momentum (today's value relative to some historical value) of advances may presage a downturn. In a bear market, loss of momentum of declines may mean the worst is over. This may explain why most A/D indicators are built on comparisons between advances and declines and can be included under two basic categories: difference indicators and ratio indicators. Within each category, however, they range from simple to complex.
Interpreting A/D indicators: To make interpretation easier, nearly all A/D indicators are smoothed with moving averages. Moving averages have two parameters: time and type. In addition to employing a variety of time periods, A/D indicators rely on both unweighted (simple) and weighted (for example, exponential) moving averages. Moving average type preferences depend on the desirability of assigning greater weight to more recent data. Averages with shorter periods are the most sensitive, which means they may be able to detect trends whose duration can be measured in days or at most weeks. Once you specify a time frame, an A/D trendline can indicate the presence of positive or negative divergence with a price index. A declining A/D trend indicates that increasingly fewer issues are contributing to an uptrending price index (bad news), and a rising A/D indicates that increasingly fewer issues are contributing to a downtrending price index (good news). Both situations may signal an impending change in the market. (Don't be surprised if several such signals prove to be wrong! A/D indicators are notorious for false signals.)
Certain A/D indicators are amenable to interpretation as overbought/oversold indicators. Their magnitude and direction provide meaningful information. However, each A/D moving average parameter combination produces unique overbought/oversold levels. (As a rule of thumb, overbought levels may indicate unsustainable bullish activity that signals "get ready to sell," while oversold levels may be sufficiently bearish to warrant preparation to buy. Actual buy/sell action, however, should await confirmation from a price index or other independent source.)
Difference indicators: Take the algebraic (signed) difference between advancing and declining issues, and you have the simplest of the A/D difference indicators. A daily look at this single number can provide a gross level of insight about the market. A moment's thought will persuade you that a positive reading need not be associated with a corresponding increase in the level of the market index. Advances may have exceeded declines for the day even though the market index (for example, New York Stock Exchange [NYSE] or Dow Jones Industrial Average [DJIA]) may have gone down ? classic divergence.
It's clear this simple difference measure can show extreme daily variability, making interpretation difficult, if not impossible. Moving averages (as short as three-day and as long as 200-day) help smooth the variations. The shorter the moving average, the more sensitive the indicator to short-term market changes (and the more volatile). The three-day (short-term), 20-day (intermediate-term) and 200-day (long-term) exponential moving average of advances minus declines comprise the Haurlan index. The short-term indicator signals a buy if the advance/decline difference exceeds 100 and a sell if it falls -150.
Intermediate-term traders need to detect trendlines and support/resistance lines for guidance, while
long-term investors glean primary trend from the long-term moving average. Advances minus declines, smoothed with three- to 40-day exponential moving averages, produce an overbought/oversold indicator. The 10-day exponential is reported to have overbought/oversold levels at +200 and -200, respectively.
The absolute (unsigned) difference of advances and declines has its own niche in the pool of A/D
indicators. Since market direction is ignored, the indicator focuses only on market activity. One interpretation of such an "activity index" is that high and low values forewarn of change or no change, respectively. According to Norman Fosback, when the absolute difference is large, the market is more likely to be nearer a bottom than a top and a low differential is probably signaling a market top. The so-called 25-day plurality index is the sum over the past 25 days of the absolute value of the advance-decline difference. Tests indicate readings in excess of about 11,000 are very bullish for both the short and longer terms (one month to one year).
The McClellan Oscillator is one of the more complex A/D difference indicators (Figure 4). The oscillator is the difference between the 19-day and 39-day exponential moving averages of NYSE advances minus declines. These averages are the 10% (fast) and 5% (slow) trends, respectively. The percentages refer to the smoothing factors in an exponential equation. The oscillator is used to forecast short- to intermediate-market moves, drawing on help from its moving average components and the McClellan Summation Index, which is the cumulative sum of daily oscillator values, useful in predicting intermediate- to long-term moves. Interpretation of the McClellan A/D indicators requires detection of highly specific patterns such as zigzags and crown-like formations. Since both the oscillator and the summation index can be positive and negative, their magnitudes also have interpretive value.
Stocks & Commodities V. 12:3 (112-115): Advance-Decline Line Basics by Daniel E. Downing
Here are the steps and examples you need to work with advance-decline data. First, each trading day, record the number of advancing issues and the number of declining issues on the New York Stock Exchange (NYSE). Next, subtract the declining issues from the advancing issues. Your end sum could result in a negative number. Keep a running total of the result of your daily subtraction. This running total is the NYSE daily advance-decline line.
First, make a simple line chart of the daily advance-decline line and plot that chart against a related price index. In the case of the NYSE advance-decline line, it can be charted against the NYSE Composite Index or the Standard & Poor's 500 cash index. As you plot the indicator and the price line, look to see if the advance-decline line makes a high with a high in the index in comparison, thereby confirming the trend. If, however, the index makes a high but the advance-decline line does not, that would be a nonconfirmation, which would be viewed as negative.
In addition, you would look to see if there are any reversal patterns in the advance-decline line. A reversal pattern is a chart formation that signals the end of one trend and the beginning of another. As an example, if the chart has been trending down and the chart formation becomes a double bottom, that is a reversal pattern and you would expect the downtrend to reverse in the advance-decline line and for a short-term uptrend to be established. Often, the indicator (in this case, the advance-decline line) would reverse trend before the external price index reverses its trend. So we would look for a reversal pattern on the chart of the indicator to point to a trend change first in the indicator and then in the index. |
