A Technical Signal Bearish Market Traders Can’t Ignore

In my Wealth365 Summit presentation last month, I discussed the importance of watching five key advance/decline lines to determine changes to the short, intermediate, and long-term trends. Specifically, I look at the A/D lines for NYSE, S&P 500, Nasdaq 100, Dow Industrial, and Russell 2000. I have followed the A/D activity in the NYSE for thirty years, and it has kept me on the right side in both bull and bear markets. In 2008, A/D data became available for the other four markets, and I have followed them closely ever since.

Using A/D line analysis can help you avoid choppy periods when the market is forming a bottom or forming a top. Often times, the A/D lines turn well before the financial media has seen the shift in the market’s momentum and sentiment.

In my April 10 presentation, I noted that the advance/declines were still in the corrective mode. This chart shows the close on April 13th as the Spyder Trust (SPY) had traced out a flag formation (lines a and b).

After the sharp market decline in early February there has been much debate as to whether the SPY’s next major move would be up or down. The daily S&P 500 advance/decline line shows a trading range (lines c and d). This type of A/D line activity is often seen when a market is forming a continuation pattern. Since early March I have been waiting for the A/D line to overcome the resistance at the top of its trading range. This would be a sign that investors and traders could again be confident buyers.

The NYSE advance/decline line is the most important of the A/D lines, as it represents the advance/decline action of 2000 major companies in the US and globally. The fact that all five of the A/D lines made new highs in January and did not form any divergences made me confident that the market was just correcting and not forming a major top.

Like SPY, the weekly chart of the NYSE advance/decline line had also developed a trading range since the January high (lines c and d).  The A/D line had moved above its WMA at the end of March and the daily NYSE A/D line made a new high on April 18. By April 27 (line 1), the weekly NYSE A/D line was close to an upside breakout through resistance. A/D lines typically lead price action, so I am expecting for the NYSE Composite to follow its A/D line higher.

I have favored the small caps since my March 7th article for Forbes.com, “Is It Time To Rotate Into Small Cap Stocks?”.  Since then, I have recommended IWM and the Vanguard Small Cap Growth ETF (VBK) to Viper ETF traders and investors. On Wednesday, May 7, the daily Russell 2000 A/D line moved above its downtrend (line b).  This indicated that the iShares Russell 2000 (IWM) would also make new highs. As of the close on Wednesday, May 16, the Russell 2000 A/D line has accelerated to the upside, as IWM has staged a major breakout.

My method of analyzing A/D lines requires looking at multiple time frames. Right now, all of the weekly A/D lines are above their WMAs, and all of the daily A/D lines have broken out of their trading ranges. This should send a strong warning to those who are bearish on the stock market. I noted this technical argument in my article from last weekend “Is Cramer’s ‘Stupid Market’ Finally Bottoming?”.

Many traders, and those in the financial media, will not be convinced that the stock market is healthy until the S&P 500 has overcome the 2800 level. Others are planning to go short near 2800 expecting a rally failure. While the S&P 500 could see a brief pullback from this level, it should be seen as a buying opportunity, as the current analysis of the A/D lines indicates that the SPY will eventually make a new all-time high.

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