McClellan Chart In Focus: Nasdaq A-D Line Lagging, Does Not Matter – By Tom McClellan

 

Chart In Focus

The cumulative daily Advance-Decline Line (A-D Line) for the Nasdaq is now finally making a slightly higher high than what it saw on Nov. 4, 2019.  But it is still below the high made on May 3, 2019.  And it is even further below the high made back on Aug. 31, 2018.  Some analysts might look at these as “divergences”, and infer a bearish implication.  But that would be wrong.

The problem is that the Nasdaq’s A-D data have an inherent negative bias, and this has been the case for most of the history of the Nasdaq market.  The reason stems from the easier listing standards on the Nasdaq vs. the NYSE, which results in more companies listing their stocks there.  If a company is going to IPO and then go broke, it is much more likely to do so on the Nasdaq.  And every day that such a stock spends dropping from its IPO price to its delisting counts in the declines column.  The result is the big negative bias we see in the Nasdaq’s A-D Line.

That negative bias can be even better seen by looking at a longer term chart.  This one starts back in 1988:

Nasdaq A-D Line

Back in the 1980s and 1990s, the Nasdaq Composite (COMPQ) kept on trending higher, even though the Nasdaq’s A-D kept trending lower.  Along the way, one could have pointed to innumerable bearish divergences, none of which mattered until we got to March 2000, and prices finally had their blowoff top.  So citing a bearish divergence back then was functionally useless as an analytical observation.

The same can be said for the price rebound off of the 2003 low.  The A-D Line never confirmed that new uptrend, and yet the price uptrend continued anyway.  Or at least we might say that it continued right up until it didn’t, and that this A-D Line was not much help in identifying when that moment was upon us.

I like to explain this point with a trivia question: When was the last time that the Nasdaq’s A-D Line made a new all-time high?  This is a trick question, because it has never made a new all-time high.  It started downward from the beginning of when the A-D data were first published in Barron’s in 1972, and the Nasdaq A-D Line has never made it back to that starting value.

The NYSE’s A-D Line is much more useful for showing us divergences which matter:

NYSE A-D Line

It does not give major divergent indications all that often, but when it does they tend to mark the price tops you’d really want to know about.

Examining the Nasdaq A-D data is not entirely without value.  If one makes extra effort to look at the acceleration taking place in those data, using tools like the Nasdaq McClellan A-D Oscillator and Nasdaq Summation Index, one can sometimes get useful insights.  But the better indications of liquidity, either good or bad, come from looking elsewhere.  So one should not get fooled by supposed divergences appearing in the Nasdaq A-D Line.

Tom McClellan
Editor, The McClellan Market Report

 

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.