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Mix-Ansicht- Cumulative A/D medium-term analysis - black elk, 24.02.2002, 10:05
Cumulative A/D medium-term analysis
Cumulative A/D medium-term analysis (chart)
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Here is a chart of the NYSE “monthly cumulative advance-declines”, from 1994 to present. It provides some interesting technical perspectives but also shows some recent puzzling divergences.
The first thing that stands out is the steep angle of ascent of the net advances over declines starting in the latter part of 1994. This strong A/D commencement exactly correlates to the market advance acceleration at the end of 1994.
Next, notice how the cumulative A/D actually peaked in April, 1998 at about 100,000. The initial decline, labeled “wave 1”, fell into the October, 1998 stock market low. However, note that when that steep correction ended and the market “shot up” on its spectacular 1999 into early 2000 run-up, the cumulative A/D went “net sideways” for the early part of the run-up into mid-1999, then began a “steep and slippery slide”, labeled “wave 3”.
This set up the peak in the Dow in early 2000, which actually coincided with the first LOW of the cumulative A/D at around 35,000. The market corrected in mid-2000, followed by a rebound in the second half which made nearly a “double bottom” on the A/D chart, and which coincided with the market high in the SPX.
So the initial divergences between the cumulative A/D and the indices action in 2000 were impending warnings signs of an intermediate turn in the market prices, although the warning signs began a year earlier than that into the run-up to the peaks in 1999.
From the end of the “wave 1” decline on the A/D chart in late 1998, through the sideways “wave 2” pause in early 1999 to the steep “wave 3” low in early 2000, the stock market prices went UP, exactly opposite the direction of the A/D line. The “inversion” has continued since. Notice that since the A/D bottom and “double bottom” in 2000, the cumulative A/D has been generally trending UP, while the market prices have been in a downtrend for those same 18-24 months.
What is going on?
Notice each of the medium-term swing lows over the past two years saw a higher A/D level - Oct. 2000, Mar. 2001 and Sept. 2001 (a “double bottom” with Mar. 2001). With the recent rebound rally since the September 2001 lows the cumulative A/D has actually made new recovery highs at around 59,000. What does this mean?
First of all, I have outlined the “choppy” general uptrend of the A/D for the past two years. Note that is appears to be forming a general “bear flag” rising diagonal chart pattern, which would generally be construed to be bearish. But is what is bearish on the chart A/D chart pattern necessarily an indication of bearish implications for the indices? (I guess what that depends on is how you define “is”...).
The A/D chart seems to be following a classic “elliott wave” type pattern, with an “initial thrust” down, a sideways consolidation, a “long impulse wave”, and presently a “rising diagonal” correction of the “long impulse wave”. Note the bearish rising wedge is in it’s “fifth wave” (and what should be an ending wave) sequence, and the distance of the “bear flag” advance has retraced almost exactly 38% of the decline!
From a pure charting perspective, the evidence would seem to be strong that the market should be “topping out” here on an Advance/ Decline basis, and if so, what would follow would be another period of steep net Declines, perhaps as far as back to the “origination point” of the steep advance at the late 1994 levels.
Finally, the net A/D decline so far (to the 2000 lows at around 35,000) is approximately a fibonacci 78% retracement of the entire net A/D advance from 1994 to the 1998 peak. Even if, on the next “bear leg down” the A/D line did NOT make new lows (perhaps only “triple bottom” to the 2000 prior lows), but the indices play “catch down” to the same retracement levels already achieved by the cumulative A/D technical indictor, it would project a low of SPX 700 and DOW 6000.
On the other hand (you knew that was coming), the way this indicator has been “inverted” and “awkward” to read since 1999, perhaps we should root for a “breakout to the upside” of the cumulative A/D chart from the current “bear flag”, and by “inverted logic” that may signal commencement of a steep decline in the market indices...!?
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