Nasdaq A/D Line Holding Back

09/15/05 12:47:10 PM

by Arthur Hill

The NASDAQ moved to a new reaction high in August, but the A/D line failed to confirm and remains well below its prior high.

Security: $COMPQ
Position: Hold

The A/D line is a cumulative measure of advancing stocks less declining stocks. It treats every issue equally and is a good representative of the broader market (the troops). The A/D volume line is a cumulative measure of the volume of advancing stocks less the volume of declining stocks. The largest stocks usually have the most volume, and this is a good indicator of large-cap performance (the generals).

FIGURE 1: A/D LINE. The A/D line is a cumulative measure of advancing stocks less declining stocks.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The A/D volume line followed the NASDAQ to a new reaction high in early August, but the A/D line failed to confirm. The A/D line moved above its 50-day exponential moving average (EMA), but never came close to its prior high (December 31, 2004). This amounts to a large negative divergence and indicates that fewer stocks participated in the April-July advance. The A/D line moved below its 50-day simple moving average (SMA), and this breadth indicator shows weakness throughout the NASDAQ.

The NASDAQ is a market capitalization-weighted index, and large-cap stocks are usually the driving force. As such, it is also a good idea to look at the A/D volume line. This indicator moved to a new reaction high in early August, which corresponds with the NASDAQ. As long as the indicator holds its 50-day SMA, the NASDAQ may avert a trend reversal. However, the A/D line is already weak, and weakness in the A/D volume line would be quite bearish for the NASDAQ. The troops (A/D line) are already nervous, and a retreat by the generals (A/D volume line) would bode most ill.

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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Nasdaq A/D Line Holding Back

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