It seems you have JavaScript disabled.

Ummm.. Yeah... I'm going to have to ask you to turn Javascript back on... Yeah... Thanks.

S&P 500 Cumulative Advance Decline On The Ledge at Trader’s Narrative





Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

Earlier this month I compared the charts of the S&P 500 index and the S&P 500 Cumulative Advance Decline line because it showed a positive divergence. Although stock prices had fallen very close to the February lows, this breadth indicator was still well above its own levels from February.

The positive divergence is still in effect. The S&P 500’s Cumulative AD would have to drop by more than 2280 points or around 20% to erase it. But a smaller shift has taken place (or is about to take place potentially) and that is grounds for some concern.

S&P500 compared to cumulative AD
S&P500 cumulative advance decline Jun 2010

Today, the AD line closed at 11527 . That is very close to the swing low from June 7th 2010 - 11359. So if we get even a little bit more deterioration, we could see breadth fall lower than price. On Thursday, the S&P 500 index closed only 23 points above the June 7th lows. And the S&P 500 Cumulative AD has to fall just 168 points to drop below its previous low. That is a very small amount for this indicator so it is entirely possible to see that happen tomorrow if the market is weak.

If that does occur, it damages the positive divergence that we’ve enjoyed so far. This level is important on the AD line not just because it was a place for a previous low but also because in January and February, it acted as resistance. This is an important indicator because it tells us just how much participation a directional move has.

Another breadth indicator that I’m monitoring is the percentage of S&P 500 components above their 50 day moving average. This percentage fell below 20% again today. Out of the past 25 days, this measure has been below the 20% level for 15 days - 10 of them consecutively. And don’t forget that the longer term percentage above 150 day moving average dropped from its lofty level some time ago. It is now at 38%. For more, see: A Subtle Shift in the Balance of Power. I’ll write more about these indicators tomorrow.

For now, it should be obvious that the more we see the market wallow in oversold conditions as it has been and refuse to mount a serious rally, the more the tone of the market changes.

Enjoyed this? Don't miss the next one, grab the feed  or 

                               subscribe through email:  

9 Responses to “S&P 500 Cumulative Advance Decline On The Ledge”  

  1. 1 Rod

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    IMHO, the Nasdaq Cumulative Advance-Decline Line is looking much worse. Relevant, since tech has been a leader throught the bull market.

  2. 2 Babak

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Rod, I don’t think the Nasdaq cumulative AD line is useful at all. It is perpetually going in one direction… down! I wrote about this a while ago: Long Term Cumulative Breadth Charts and a bit later here. This is why I prefer to use the S&P 500 index cumulative AD.

  3. 3 Q

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Babak - nice work as always. I’m curious as to your thoughts on all of the 90% upside and downside days over the past two months. We just saw two more 90% downside days this week and by my very rough estimates on NYSE common stock only trading, it looks like twelve 90% down days and six 90% up days since mid-April. Speaking aloud to myself, is this an indication of exhaustion or major distribution by institutions/change of trend?

    According to the paper from Paul Desmond on 90% days, he says…

    “Impressive, big-volume “snap-back” rallies lasting from two to seven days commonlyfollow quickly after 90% Downside Days, and can be very advantageous for nimble traders. But, as a general rule, longer-term investors should not be in a hurry to buy back into a market containing multiple 90% Downside Days, and should probably view snap-back rallies as opportunities to move to a more defensive position.”

    What do you say?

  4. 4 Babak

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Q, the prevalence of 90-90 days has increased dramatically. Put simply, they are not the rare and special animal they used to be. I’m not sure if that means that they’ve lost their significance. I could argue one way or the other but honestly, no one really knows. Here is a historical look at what happens when we have 2 90% down days in a 5 day period from Rob at Quantifiable Edges.

  5. 5 PAUL MONTGOMERY

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    I think A/D divergence studies are more useful the shorter the time frame.

    This would make the June Low much more relevant than Feb - and your analsis very timely Babak - thanks

  6. 6 Babak

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Paul, the lukewarm index showing today was contrasted with much stronger breadth. The S&P 500 cumulative AD actually rose by 1.5% so we’re backing away from the ledge, a bit.

  7. 7 dave A.

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Great site here !!! Quic kquestion wouldn’t this have more significance if the A/d took out the feb lows ? Eve nif it goes lower here we have been in a selling pattern for 2 months .

  8. 8 Mark Emdee

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Something is not right. You show a positive divergence at time periods for the lows in the SP500 chart as to compared to the same time periods of the cumulative advance decline chart. But there is also a positive divergence at the time periods for the bounce from those lows (around March 1st and June 17th) in the SP500 at the same level of about 1118, as compared to the cumulative advance decline; and the market very soon had a four day sell off. Your one positive divergence data point does not tell enough.

  9. 9 Wes

    Deprecated: preg_replace(): The /e modifier is deprecated, use preg_replace_callback instead in /home/traders/public_html/wp-includes/functions-formatting.php on line 76

    Babak,

    I guess we’re looking at different overbought/oversold statistics. My data show the market maximum overbought on Tuesday (22nd). Even the 21 and 30 day indicators were positive at that time.

    I would hardly characterize the ensuing action as “wallowing in oversold conditions”.

    We should be maximum oversold between Wednesday of next week and Tuesday of the following week, depending on market action.

Leave a Reply