Trader’s Narrative

Sometimes it helps to understand the markets by peeling back the price layer and peeking at the internals like advance decline numbers. I mentioned before that extremes of advance decline usually point out the start of a trend.

Last week we saw back to back extreme days in this metric. On Thursday, May 10th 2007, we had the AD line fall to -1731 (close to maximum lows ~ -1750). And the next day, on Friday, May 11th 2007, it rose to +1200 (not that close to maximum highs ~ +1400). This is quite unusual.

This back to back up and down wasn’t at all as extreme as the late February to early March bottom but it still was noteworthy. The last time we had this magnitude of up and down advance decline numbers was in late November of last year.

On November 27th 2006, the Nasdaq advance decline shows an extreme -1920 reading. Then just two days later, on November 29th 2006, it flipped to the other side with a +1101 reading. As you can see on the graph below, this was followed by a continuation of the uptrend: