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A/D
Indicators |
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Indicators based on the "advances" and "declines" concept -
The lowest A/D issues and A/D volume ratios in 1998
In 1998, there were 5 instances where the S&P 500 index reached
critically low A/D issues and A/D volume ratios. Three of those occurrences were
clustered in late summer of 1998.
| Table
1. Lowest critical A/D
volume and A/D issues ratios reached in 1998 year.
S&P 500 index.
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Chart #1: Lowest critical
A/D volume and A/D issues ratios. S&P 500 index. January to June
1998. (Note: In the bottom pane, the A/D issues ratio is displayed
on top; the A/D volume ratio is the number just below it).
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Chart #1 - Point A:
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The first time A/D volume and issues ratios hit critically low levels in 1998 was on January 9.
Almost immediately after this occurrence, the S&P 500 index reversed its
previous downtrend to an uptrend and rallied nearly 22% over the next four
months (peaking in April 1998). Prior to the recovery rally, the S&P 500 had
tumbled by about 6% in only five 5 trading days (i.e., between January 6 and 9,
1998). This move lower quickly generated the extremely negative sentiment
reflected in the critically low A/D readings.
To get a better understanding of why
the index made such a strong recovery, we need to review what happened
during the second half of 1997, a time where we noted three instances of
A/D ratios reaching critically low levels. This was the case in both
August and October 1997 (as a reference, use a one-year S&P 500 chart
and apply a 2-day A/D moving average).
Our analysis shows that each time the
two A/D ratios hit critically low levels, the market reversed from a
previous downtrend to an uptrend. During the three recoveries, we did
not however see the critically high A/D ratios, in other words, A/D
ratios that would indicate an extremely high market sentiment. During
the entire period (July 1997 - January 1998), A/D issues and A/D volume
ratios remained below 10 – a positive but not critical level. The only
exception was November 3, 1997. During the recovery rallies in
the
second half of 1997, the S&P 500 never reached levels that could be
considered extremely “overbought” - at least not to the same extent as
the index had been “oversold” before the recovery rallies took place. As
a result, the market became progressively more oversold each time
extremely low sentiment readings were reached. By January 9, 1998, the
market was so deeply oversold that it was prone to a sudden upside
reversal and long-term run up.
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Chart #2: Lowest critical
A/D volume and A/D issues ratios reached in 1998. S&P 500 index.
(A/D issue ratio at the top and A/D volume ratio at the bottom)
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| Chart #2 - Point A:
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On April 27, 1998, the market declined
to point A, where critically low A/D ratios were recorded. From this
point forward, the S&P 500 index traded within a tight range for almost
2 months (i.e., until June 16) before commencing a recovery run. Chart 2
shows that during most of this time, sentiment readings remained
predominantly negative.
There were only two instances where the S&P 500
breached the 1,076.70 index point level seen on April 27. On May 27, a
low of 1,074.39 points was reached, and the S&P 500 declined as low as
1,074.67 points on June 16. It is interesting to note that sentiment
readings on those two days did not fall below the extremely negative
readings found on April 27. The negative sentiment that prevailed for
such an extended time - in addition to the extremely low readings on
January 9 – may have been the key contributing factors for the S&P 500’s
June/July 1998 rally of more than 9%. |
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| Chart # 2 - Points B, C, D:
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Only 16 trading days separated the next
three instances where readings for A/D ratios were critically low
Following this cluster of critically low A/D ratios, the S&P 500
proceeded to gain approximately 38% over the next 5 months (i.e., August
- December 1998).
A clustering of days with
critically low A/D ratios within a relatively short time span points to
an extremely oversold market. This indicates a good probability that the
market is primed for a strong upswing. |
Next
V. K.
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