Nasdaq Breadth Joins Oversold Chorus

04/21/05 08:50:09 AM

by Arthur Hill

Nasdaq breadth has become oversold, but a low in the index may still be a few days away.

Security: $COMPQ
Position: Hold

Nasdaq breadth has become oversold, but previous bounces suggest that an index low may still be a few days away. These breadth indicators are computed using the volume of advancing issues (up volume) and the volume of declining issues (down volume). AD volume net equals up volume less down volume. To smooth out this data series, a 10-day simple moving average (SMA) has been applied. This indicator oscillates above and below the zero line with overbought readings above +500 and oversold readings below -500. The indicator works just like any other oscillator (stochastics, relative strength index [RSI] or moving average convergence/divergence [MACD]).

The year 2005 has been a largely down year and there have been more oversold readings than overbought ones. In fact, the indicator has yet to produce an overbought reading. In addition, note that each reaction high is lower (gray arrows). This shows weaker and weaker buying pressure on each advance. The April high didn't even make it above the zero line, and sellers are clearly in control of this index. (See Figure 1.)

Figure 1: The indicator has moved to oversold levels for the fifth time this year. Note that prior oversold readings did not signal the exact end of index decline. The red vertical lines show the first oversold readings and the green lines show the index low.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The indicator has moved to oversold levels for the fifth time this year. Note that prior oversold readings did not signal the exact end of index decline. The red vertical lines show the first oversold readings and the green lines show the index low. The index bottomed six days after the January and March oversold readings. The most recent oversold reading occurred on April 15, and the index managed a bounce over the last few days. However, if the prior bounces are any guide, we may have to wait until next week for a bottom in the index.

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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