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A/D
Indicators |
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Indicators based on the "advances" and "declines" concept -
The lowest A/D issues and A/D volume ratios in 2006
Over 30% on the S&P 500 index
by trading mid-term advance/decline indicators
In, there were 6 instances
where the S&P 500 index reached critically low A/D issues and A/D volume
ratios (see table below).
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Table 1.
Lowest critical A/D volume and A/D issues ratios in 2006. S&P 500
index.
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In December 2005 and January 2006, the S&P
500 traded mainly sideways. Only in February 2006 did the index resume the
mid-term uptrend it had begun in October 2005. On May 11, 2006, the index
changed direction sharply and started to move down. In the middle of June,
the S&P 500 reached a key support level and began a new uptrend.
As of January 2006, we noted two strong
uptrends. The index generated a mid-term run higher after critically low A/D
ratios readings had appeared.
Chart #1:
S&P 500 lowest critical A/D volume and A/D issues ratios.
January 2006.
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Chart #1 - Point A:
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On
January 20, 2006, the S&P 500 index declined by approximately
2%. After reaching critically low A/D issues and A/D volume
ratios on that date, the index started a recovery the next
session. In February 2006, the S&P 500 declined again; however,
it slid only about 0.5% below its January 20 level. A reversal
to the upside then followed where the index recovered 5.2% by
the middle of May, 2006. |
Chart #2:
S&P 500 lowest critical A/D volume and A/D issues ratios.
May - October 2006.
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Chart #2 - Point A, B, C,
D:
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During this
short time, we noted 4 occurrences of critically low A/D issues and A/D
volume ratios. After hitting critically low sentiment readings on May
17, 2006 (chart 2, point A), the S&P 500 recovered by about 1.6%;
however, it still continued its downtrend. On June 5, 2006 (chart 2,
point B), the S&P 500 dropped about 1.5% and again generated critically
low sentiment readings. The index "ignored” these readings and continued
to slide. On June 12, 2006 (chart 2, point C), we again noted
critically low sentiment readings. On July 13, 2006 we once again read
low sentiment readings after the S&P 500 index retested it's most recent
lows. Following this occurrence, the S&P
500 started a recovery rally, gaining 6.1% by the end of August 2006.
A cluster of critically low A/D issues and A/D volume ratios appearing
within a short time span is generally indicative of an extremely bearish
sentiment. It reflects a market that is extremely oversold and thus
prone to a strong mid-term upswing. |
Chart #3:
S&P 500 lowest critical A/D volume and A/D issues ratios.
November 2006 - February 2007.
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Chart #3 - Point A:
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On November 27, the S&P 500 dropped by almost 1.5%. This
strong decline led to the critically low market sentiment readings seen
at point A. The critically low market sentiment reached at point A gave
further impetus to this uptrend, extending its run for another 5.8%. |
We saw 3 strong recovery rallies following critically low
sentiment readings.
Once again, our Advance / Decline indicators prove that during
a downtrend - when we see the A/D issues ratio fall below 0.12 and the A/D
volume ratio decline to similar levels - we can confidently anticipate an upside
reversal. The strength and duration of the ensuing up-move will depend on how
substantially the index had declined.
Furthermore, extremely low sentiment readings are a perfect
indicator to define the end points of a mid-term downtrend; this information
can be used successfully for mid-term trading applications (click
here to see our research results).
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