The Daily Chartist: The Advance/Decline Line Revisited

The Chartist explains the relationship between the overbought/oversold oscillator and the a/d line.
Author:
Publish date:

Feb. 14, 2000

The overbought/oversold oscillator I use is based on the advance/decline line. Because the advance/decline line (or advancing and declining volume) tells us what individual stocks are doing, I believe it's a good guide to figuring out when a majority of stocks are overbought and oversold. (See my previous

column for a detailed explanation of this indicator.)

The big three averages are either price weighted (the

Dow Jones Industrial Average

) or market-cap weighted (the

Nasdaq

and the

S&P 500

) so they do not necessarily encompass a vast universe with equal weightings. The advance/decline line, however, is about momentum, not price. Because it shows the 10-day moving average of the a/d line, it measures how today's market performance compares to the performance of 10 days ago. Is the market getting stronger or is it losing steam?

In the case of the

NYSE

these days, the majority of stocks are in bear markets, with approximately 65% of stocks trading below their 200-day moving averages. While an oversold reading typically calls for a bounce, we cannot expect bounces in a bear market to be as lively as those in a bull market. A truly weak market will get oversold and stay oversold. Therefore, the S&P's 100-point climb following the recent oversold reading is pretty good news for such a poor-acting market.

The

Nasdaq

, however, is a bull market for many of the reasons I've described over the past several weeks. In a bull market, we expect overbought readings to provide sharp but narrow declines, which provide buying opportunities. The Nasdaq is just now getting overbought, which means I expect more of the same kind of sharp downward swings that we've seen since the beginning of the year.

Overbought/Oversold Oscillator

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.