Generals Lead The NASDAQ Charge

06/10/05 12:06:36 PM

by Arthur Hill

The NASDAQ advance/decline volume line has sharply outperformed the A/D line over the last few weeks, showing leadership from the generals.

Security: $COMPQ
Position: Hold

The A/D line is a cumulative measure of advances less declines. Regardless of market-cap or volume, each issue (stock) counts once, and this is a good representation of the broader market. The A/D volume line is a cumulative measure of advancing volume less declining volume. The stocks with the highest volume dominate this index, and these also tend to be the stocks with the largest market capitalization. I like to think of the A/D volume line as the "generals" of the NASDAQ and the A/D line as the "troops" (Figure 1). It is hard to fight a war (sustain a trend) without both participating.

The NASDAQ advanced more than 200 points in May, and this advance was clearly led by the generals. The A/D volume line surged above the January trendline and is currently challenging its February high. In contrast, the A/D line has yet to break its 50-day exponential moving average (EMA) or the January trendline. In addition, the A/D line remains well below its February high, and the troops are not that enthusiastic about this rally.

Figure 1: The Generals vs. the Troops

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

It is okay for one to lag the other, but not for an extended period of time and not by a large margin. For the current rally in the NASDAQ to extend and have legs, the troops need to join the battle, and the A/D line needs to break above the January trendline. As long as the A/D line severely lags, the staying power of this rally will be in question.

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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