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A/D
Indicators |
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Indicators based on the "advances" and "declines" concept -
Examples of lowest A/D issues and A/D volume ratios
1997 year (second half)
In the second half of 1997, the S&P 500 index
hit critically low A/D issues and A/D volume ratios three times, as summarized
in Table 1 below:
| Table
1. Lowest critical A/D
volume and A/D issues ratios. S&P 500 index. Second half of 1997.
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Chart #1:
Lowest critical A/D volume and A/D issues ratios. S&P 500
index. Second half of 1997. (In the bottom pane, A/D issues
ratios are listed at the top and A/D volume ratios at the
bottom).
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Chart #1 - Point A:
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On August 15, 1997, the
S&P 500 hit critically low A/D issues and A/D volume ratios. Within
three trading days, the index advanced by more than 4%. Two months
later, the index had recovered by about 9%. |
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| Chart 1 -
points B and C: |
Since these two incidents
occurred such a short time apart, we could consider them as a single
event. A cluster of critically low A/D issues
and A/D volume ratios over a short period of time is generally
indicative of an extremely bearish sentiment - in this
particular case, it would in fact be more appropriate to say that
trading was gripped by utter panic.
On October 28, the S&P 500 index traded
almost double its daily average volume for 1997. If you refer to a
six-month index volume chart of the index for the period between July
1997 and February 1998 (apply a one-day volume moving average (VMA)),
you will see the huge volume surge that occurred. This signifies that in
the panic that took place, a vast number of low priced shares were being
transferred from one group of investors to another. The market became
extremely oversold. An exceedingly bearish market sentiment (in this
particular case - two days of extremely low A/D ratios readings a short
time apart) coupled with a high-volume sell-off: this is a perfect
indication of a market that was exceptionally oversold and thus primed
for a long-term reversal to the upside. In fact, the day after the
October 27, 1997 low, the S&P 500 rallied by more than 4%. Within less
than 2 months, the index had recovered by 12%, and by June 1998, the
index had gained over 30%. October 27, 1997 is a date worth mentioning
for another reason: in the almost 8 years since then (as of the writing
of this article), the market has not even come close to matching the
exceptionally low AD issues and volume ratios seen on that date.
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Next
 V. K.
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