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Thursday, December 01, 2016

Is Advance-Decline Line Divergence A Big Deal? (Spoiler Alert: Yes)

Non-confirmations by the NYSE Advance-Decline Line of new market highs have often signaled major trouble for stocks – will it be the case this time?

In some ways, the post-election “Trump Rally” has been among the most explosive stock market bursts of all time. Depending on the market sector or style, some bounces have been multiple standard deviations beyond anything we’ve seen in years. This has left us, naturally, with many attractive-looking charts of stocks, indices, etc., hitting new highs. But as with any rally, this one isn’t “perfect” from a technical perspective. And among the imperfections is a potentially significant one: the lack, as of yet, of a new high in the NYSE Advance-Decline Line.

If you’ll recall, the Advance-Decline Line, or A-D Line, is a cumulative running tally of NYSE Advancing Issues minus Declining Issues on a daily basis. Now, regarding the non-confirmation, or “divergence”, there are plenty of reasonable caveats which we will touch on below. First off, however, why are such divergences potentially significant? Generally speaking, as we are big proponents of strong market breadth within a rally, we like to see the A-D Line going to new highs along with the indices. That suggests that there is strong participation among stocks in bolstering the rally.

From a technical perspective, a non-confirmation by the A-D Line has historically been a significant warning for stocks – at times. Specifically, as we have mentioned before, every cyclical top in the S&P 500 in the last 50 years has been accompanied by a divergence in the A-D Line.

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2 comments:

Anonymous said...

Huh?

Anonymous said...

This market is way overdue for some profit taking. Been on a tear for 7 years. Artificially Low interest rates have built an overconfidence in the markets. Wealthy hedge fund managers will protect themselves, but us average investors have no way to protect our 401k. Why can't we buy 'insurance' to protect on the corrections like they can?