Sunday, December 19, 2010

Watch out for the negative divergence

The advance-decline line is the most basic of all market breadth indicators. It is the calculated by subtracting the number of declining stocks for the day from the number of advancing stocks for the day. Now, in a normal, healthy uptrend, one would expect this indicator to increase along with the overall markets. Below is a chart of the advance-decline line comparing it with the SPX index (in yellow).
It can be seen above that though the market is making new highs this month, the advance-decline is not doing so and is still below the highs it made in early November. I am not advocating going short here, but just be cautious and do not get complacent.

Take care and good luck!

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