A/D Line Showing Increasing Divergence

 

Growth investors are always keen to gauge the health of the overall market. In our shop, we make sure that we are trading in a sustainable uptrend confirmed by the indices, our portfolio, and leading growth stocks. Although price and volume reign supreme in determining the current state of the market, secondary indicators—such as the Advance/Decline Line (A/D Line)—can also help us spot potential for strength or weakness.

An A/D Line is calculated as follows: A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Previous Period's A/D Line Value. Look for divergence between the A/D Line and the indices to gauge market strength or weakness. You can view this technical indicator by typing in “GMIAB” into the symbol box for the Nasdaq Advance-Decline Line or “GMIAA” for the NYSE Advance-Decline Line.

An interesting observation our team has made is the increasing divergence between the indices and their respective A/D Lines (shown below). Although every reaction should be confirmed by price action, this divergence serves as a subtle warning that fewer stocks are participating in the rally, which results in a market with narrow leadership.

 

The Nasdaq is hitting new highs yet we are missing confirmation from the A/D Line. This  indicates that we are in a “stock picker’s market,” which requires us to be both correct on stock selection and managing the trade as well. So if you are finding this rally more challenging, this is one of the reasons.

Furthermore, the S&P 500 has not confirmed the new price high with the A/D Line. The A/D Line is close to a new high and a little slower to confirm this time around, which is another sign of weakness.

As always, if you have any questions, please call us at (800) 424-9033.

Best returns,

The MarketSmith Team