On May 15, 2005 (line 1), the A/D line moved above the key resistance at line d, which confirmed the positive divergence.
It is important to note that the A/D line was acting stronger than prices, and while the NYSE was at 7124 and still well below the April high at 7222 (line e), the A/D line was higher.
The NYSE Composite did not overcome its resistance until 17 trading days after the A/D line. Though this may seem rather surprising, this is a rather common occurrence with the A/D line.
Over the next three months, the A/D line was rising steadily, but on August 12, it failed to make a new high with prices (point 2). This was the first warning signal.
The NYSE Composite made further new highs on September 9 at 7665 (point 3), but the A/D line failed to make new highs, forming a negative divergence, line f. This divergence was completed on September 20 when support at line g was broken. This was 11 days before the important chart support at line h was broken.
With the popularity and liquidity of ETFs like the Spyder Trust (SPY), I started to combine it with the NYSE A/D line and found the signals to be quite reliable. SPY peaked in May 2006, which made the followers of the “Sell in May…” philosophy happy for a while.
The ensuing decline in SPY took it 7.5% lower, as it bottomed at $122.34 on June 14, but the NYSE A/D line only declined by 2.4%. This was a sign that the market was showing internal strength. The A/D line tested long-term support at line a, but no divergences were formed. On July 26, SPY closed at $126.83 and the downtrend in the A/D line was broken (line 1).
By early August, the A/D line was well above its rising weighted moving average (WMA) and on August 29 (line 2), the A/D line moved above the May highs with SPY closing at $130.58. It was almost a month later before the SPY surpassed its May highs.
The A/D line remained very positive until February 2007, when negative news on the Chinese market caused a sharp selloff in the US. This took the A/D line below its weighted moving average for the first time since July. The A/D line did hold up better than prices and formed a slight positive divergence before turning higher.
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