Technical Indicators: A (part 1)
A/D Line (Breadth)
The Advance/Decline Line (Breadth) is one of the oldest and most basic key indicators, plotting the number of advancing issues divided by the total number of both advancing and declining issues. The basic premise behind volume indicators, including the Accumulation/Distribution Line, is that volume precedes price. Volume reflects the amount of shares traded in a particular stock and is a direct reflection of the money flowing into and out of a stock. Many times before a stock advances, there will be period of increased volume just prior to the move.
If there are more advancing issues than declining issues, the market is said to be strong or having good breadth. New highs in the index have tended to lead peaks in the market. When the line is breaking out to the upside one can usually expect the market pick up in the next few months.
A/D Line (Daily)
A/D Line Daily - The most widely used indicator of market breadth and one of the oldest is an advance/decline line. This simple but powerful indicator is constructed by taking a cumulative total of the difference of the number of NYSE issues advancing over those declining in a day. Similar indexes may be constructed for the NASDAQ, Amex, or sub-indexes.
Because the number of issues listed on any of these exchanges has expanded greatly in recent years, a simple plurality of advances over declines will give greater weight to more recent years so a better way to look the numbers is to use a ratio.
The A/D line is a leading indicator and will peak before the major averages because of two reasons. First because interest rates peak before stock prices by about 9 months, then interest rate sensitive stocks tend to peak before the rest of the market and pull down the A/D line. Secondly, some industries peak before others as the economy cools off and these industries and sectors will drag down the A/D line before the rest of the economy.
|
Absolute Breadth Index
The Absolute Breadth Index is a market momentum indicator developed by Norman G. Fosback that displays the activity, volatility, and change taking place on the New York Stock Exchange. It calculates the difference between the advancing issues and declining issues and, by dropping the sign (taking the absolute value), discards the actual direction prices are headed.
By discarding market direction, the ABI functions as an "activity index." High values indicate market activity and change, while low readings indicate a lack of change. Fosback has noted historically high values typically lead to higher prices three to twelve months later. One highly reliable variation of the Absolute Breadth Index is to divide the weekly ABI by the total issues traded. If after a ten-week moving average is calculated and readings are above 40%, they are said to be very bullish. Readings below 15% are bearish.
The Absolute Breadth Index is calculated by subtracting the number of declining issues from the number of advancing issues and taking the absolute value of the difference:
ABI = |Advancing Issues - Declining issues|
recalling that |-100| = 100 = |+100|
|
| |
Accumulation Swing Index
Developed by Welles Wilder, the Accumulation Swing Index is a cumulative total of the Swing Index. It compares current prices and previous prices to illustrate the 'real' price of a security. As Wilder said, "Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market." The Accumulation Swing Index is his attempt to show that line and provide a numerical value to quantify price swings.
With the Accumulation Swing Index attempting to show the "real market," it closely resembles actual prices. This allows usage of classic support/resistance analysis on the Index. Typical analysis involves looking for breakouts, new highs and lows, and divergences. The summary of the calculation for the Accumulation Swing Index is:
Previous Accumulation Swing Index + Swing Index
Step-by-step instructions on calculating the Swing Index are provided in Wilder's book, New Concepts In Technical Trading Systems.
Accumulation/Distribution Line
The Accumulation/Distribution Line was developed by Marc Chaikin to assess the cumulative flow of money into and out of a security. He decided to focus on the price action for a given period (day, week, month) and derived a formula to calculate a value based on the location of the close, relative to the range for the period. This is the "Close Location Value" or CLV. The CLV ranges from plus one to minus one with the center point at zero.
CLV = [ {(C-L) - (H-C)} / (H-C) ]
The signals for the Accumulation/Distribution Line are fairly straightforward and involve divergence or confirmation. A bullish signal is given when the Accumulation/Distribution Line forms a positive divergence. Be wary of weak positive divergences that fail to make higher reaction highs. A two-week positive divergence should be suspect. However, a multi-month positive divergence deserves serious attention.
The Accumulation/Distribution Line can also be used to confirm the strength or sustainability behind an advance. In a healthy advance, the Accumulation/Distribution Line should remain up or at least move in an uptrend. If the stock is moving up at a rapid pace, but the Accumulation/Distribution Line has trouble making higher highs or starts going sideways, buying pressure is relatively weak.
The Accumulation/Distribution Line can at time have problems detecting subtle changes in volume flows. The rate of change in a downtrend could be slowing, but it may be impossible to detect until the Accumulation/Distribution Line turns up. This drawback has been addressed in the form of the Chaikin Oscillator or Chaikin Money Flow.
|
