Advance Decline indicators, technical analysis, advance, decline, ratio, trading

- Advance/Decline Analysis

Advance/Decline Technical Analysis (Breadth Analysis)

Advance Decline Ratios in 2006

Advance Decline indicators, S&P 500, technical analysis, chart, advance, S&P 500 chart, decline, ratio, trading, research, 2006

The lowest Advance/Decline (A/D) issues and A/D volume ratios in 2006

Over 30% on the S&P 500 index
by trading mid-term advance/decline indicators

In, there were 6 instances where the S&P 500 index reached critically low A/D issues and Advance/Decline volume ratios (see table below).

Table 1. Lowest critical A/D volume and A/D issues ratios in 2006. S&P 500 index.

Date	Critical A/D Issues Ratio	Critical A/D Volume Ratio	Magnitude of Uptrend (Recovery Rally)	Chart and Point Reference
11/27/2006	0.08	0.10	5.8%	Chart #3 - A
07/13/2006	0.12	0.13	13.3%	Chart #2 - D
06/12/2006	0.11	0.11	3.6%	Chart #2 - C
06/05/2006	0.05	0.05	0.6%	Chart #2 - B
05/17/2006	0.09	0.12	1.6%	Chart #2 - A
01/20/2006	0.11	0.09	5.2%	Chart #1 - A
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In December 2005 and January 2006, the S&P 500 traded mainly sideways. Only in February 2006 did the index resume the mid-term uptrend it had begun in October 2005. On May 11, 2006, the index changed direction sharply and started to move down. In the middle of June, the S&P 500 reached a key support level and began a new uptrend.

As of January 2006, we noted two strong up-trends. The index generated a mid-term run higher after critically low Advance/Decline ratios readings had appeared.

Chart #1: S&P 500 lowest critical A/D volume and A/D issues ratios. January 2006.
Advance/Decline chart 2006 February

Chart #1 - Point A:

On January 20, 2006, the S&P 500 index declined by approximately 2%. After reaching critically low Advance/Decline issues and Advance/Decline volume ratios on that date, the index started a recovery the next session. In February 2006, the S&P 500 declined again; however, it slid only about 0.5% below its January 20 level. A reversal to the upside then followed where the index recovered 5.2% by the middle of May, 2006.

Chart #2: S&P 500 lowest critical A/D volume and A/D issues ratios.
May - October 2006.

Chart #2 - Point A, B, C, D:

During this short time, we noted 4 occurrences of critically low Advance/Decline issues and Advance/Decline volume ratios. After hitting critically low sentiment readings on May 17, 2006 (chart 2, point A), the S&P 500 recovered by about 1.6%; however, it still continued its downtrend. On June 5, 2006 (chart 2, point B), the S&P 500 dropped about 1.5% and again generated critically low sentiment readings. The index "ignored" these readings and continued to slide. On June 12, 2006 (chart 2, point C), we again noted critically low sentiment readings. On July 13, 2006 we once again read low sentiment readings after the S&P 500 index retested it's most recent lows. Following this occurrence, the S&P 500 started a recovery rally, gaining 6.1% by the end of August 2006.

A cluster of critically low Advance/Decline issues and Advance/Decline volume ratios appearing within a short time span is generally indicative of an extremely bearish sentiment. It reflects a market that is extremely oversold and thus prone to a strong mid-term upswing.

Chart #3: S&P 500 lowest critical A/D volume and A/D issues ratios.
November 2006 - February 2007.

Chart #3 - Point A:

On November 27, the S&P 500 dropped by almost 1.5%. This strong decline led to the critically low market sentiment readings seen at point A. The critically low market sentiment reached at point A gave further impetus to this uptrend, extending its run for another 5.8%.

We saw 3 strong recovery rallies following critically low sentiment readings.

Once again, our Advance/Decline indicators prove that during a downtrend - when we see the Advance/Decline issues ratio fall below 0.12 and the A/D volume ratio decline to similar levels - we can confidently anticipate an upside reversal. The strength and duration of the ensuing up-move will depend on how substantially the index had declined.

Furthermore, extremely low sentiment readings are a perfect indicator to define the end points of a mid-term downtrend; this information can be used successfully for mid-term trading applications (click here to see our Advance/Decline research results).

Next: Advance/Decline in 2002-2003

V. K.

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