NYSE Breadth Deteriorates Fast

03/28/05 09:06:20 AM

by Arthur Hill

Even though the NYSE Composite index is holding above its January 2005 low, relative weakness in a key breadth indicator could spell trouble.

Security: $NYA
Position: Sell

Regardless of market capitalization or volume, the A/D line represents all issues on the NYSE Composite equally. An advance in Wal-Mart (~$214 billion market cap) is just the same as an advance in NL Industries (~1 billion market cap). As such, the A/D line represents the "rank-and-file" or the masses within the NYSE Composite.

There are two steps to calculating the A/D line. First, subtract declining issues from advancing issues. The amount will be positive when there are more advancers and negative when there are more decliners. Second, each day's reading is applied to the previous day to form a cumulative or running total. This is the A/D line.

Figure 1: NYSE Composite. While the New York Composite is still holding above its January low (red arrow), the A/D line broke below its January low.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The A/D line foreshadowed the August reversal and autumn advance. Note that the A/D line formed a large positive divergence over the summer, and this preceded the early October breakout. By the time the NYSE Composite broke above resistance in October 2004, the A/D line was trading at a multimonth high (green vertical line). This showed broad strength within the index, and the advance continued for several months.

The A/D line kept pace with the advance from September 2004 to March 2005, but a recent support break shows broad selling pressure. While the NYSE Composite is still holding above its January low (red arrow), the A/D line broke below its January low. This is not a negative divergence, but shows relative weakness in the A/D line and among the masses within the NYSE Composite. Relative strength in the A/D line preceded the autumn advance, and relative weakness could foreshadow a spring decline.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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