From the flash crash on May 6 through the end of August 2010, the bulls and bears battled, with many bears looking for a major stock market collapse in the latter part of August. During that period, I wrote extensively about how the NYSE Advance/Decline (A/D) line was acting stronger than the major averages, which in my view, was positive for the intermediate term.
I wanted to update this article written on July 13 because it discusses several good examples of why the market internals are important. Let’s first look at the current market analysis.
Figure 1
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The downtrend in the NYSE A/D line, which is a cumulative total of the advancing stocks minus the declining stocks, moved through its downtrend, line b, on July 13 (vertical line 1). This was a positive sign, and on August 9 (point c), the A/D line surpassed the April highs, reflecting the market’s internal strength. Towards the end of August, the S&P 500 dropped into the 1040-1050 support zone but held above the July lows. By comparing the relative slopes of lines e and d, you can also see that the A/D line was acting stronger than prices on the correction. Then on September 7, the A/D line moved above the previous high and broke its downtrend, line c, which was a very positive sign.
Currently, the A/D line has not yet moved above the November 5 highs, but it is very close. If the A/D line weakens further over the next few days, we may see a deeper correction before the end of the year. There are no signs yet of a change in the intermediate-term trend, however.
I hope you'll please take a moment to review the original Bull vs. Bear article for more in-depth analysis and instruction on following the market internals.
See "Bear or Bull Market: Debate Rages on."
Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.
