Before I post market internals/breadth charts I would like to point out that I use these charts only as guidelines. These act to caution me about the internal strength of the market. The ultimate indicator is price, its confirmation is required for taking any kind of action.
NSE Advance – Decline Line
This is the standard advance decline line. If there is a divergence with the market index price then it could be warning of coming trend change. This indicator has to be used with caution because it leads the price by a wide margin. For example, if the market is rising and the advance decline line starts to fall it doesn’t mean that the market will start to fall. This divergence could go on for months before the price reacts or it might just turn out to be nothing.
In the NSE advance decline chart below note that it supported the market very well in the mid-2004 rally and it was neutral to supportive in the mid-2005 rally but its divergence with the market has now been going on for more than an year. It really fell off in Sep/Oct 2005 and has not recovered since. I am not sure how long this will go on but it is something to keep an eye on and not go over the board with long-term investing.
NSE Monthly New Highs – New Lows
This is the monthly new highs – new lows chart (not the 52 week version). I use this to give me an indication of how the broad market stocks are performing in the intermediate term. For example if a strong rally starts I look at this chart to see if any significant percentage of stocks are supporting the rally but breaking out to new monthly highs. If they are not then it acts as caution. It is the same case for declines, if the market declines but not too many stocks hit monthly lows then it means that the broad market is not supporting the decline.
In the chart below look at the last part of the rally in Sep 2005, not too many stocks were hitting new monthly highs though the market was making new highs. Also look when the market rallies after a decline (especially the recent rally). There should be sudden spurt in the new highs indicating good market support for the rally. This recent rally (with today’s breakout) is looking good.
NSE Market Participation
The idea behind this chart is mine. It uses the market advances/declines & advancing/declining volume to compute the power behind a day’s move. This gives important short-term divergence indications. This again similar to new highs – new lows should give clear indications when market rallies or declines. This gives clearer indications than the new highs – new lows chart. This is a more short-term chart than the monthly new highs – new lows chart.
In the chart below look for confirmations when a new rally begins after a pullback or a correction, there are clear signals visible.
Hiren said
I would presume that the Advance dcline chart is a daily chart. Kindly put daily or monthly or whatever clearly wherever needed. From the way the, you have described, it does not seem too reliable an indicator considering the length of the divergence. RSI is effective in very short divergences.
Hiren said
Where volume is concerned, there is a book by William O Neil on shortselling which states that one has to see four five distribution days-price closing lower than previous close at higher volumes over a span of two to three weeks followed by a decline in price over 50day moving average. If it goes below 200EMA, it could be the confirmation of the onset of a bear market?
Hiren said
Considering that the distribution question mentioned above is on daily charts, isn’t the new high new low monthly rather late in the day? Can’t it be done faster?
Hiren said
In the united states, the three main indices are NASDAQ, S&P 500 and Dow which are tracked for distribution which any one of them can show. In India it should be just the nifty and sensex?
It is also said that the stocks which led the advance top around the same time the mkt distribution starts.?
SwingTrader said
>>From the way the, you have described, it does not seem too reliable an indicator considering the length of the divergence. RSI is effective in very short divergences
Understand one thing very well, no indicators I know are reliable. The only reliable indicator is the price itself. All indicators more or less lag.
You are comparing apples to oranges if you compare Advance-Decline line with RSI. RSI is generally used as a very short-term oscillator. Adv-Dec line is used to get warnings about long-term market internals.
Don’t get too comfortable with any one indicator. Every indicator gives false signals. RSI has many known disadvantages too. Most of the indicators are useless. Even the fast stochastics I use is not reliable, I might as well use a three bar pullback instead of using stochs and it would work just fine with my trading strategy.
>>Where volume is concerned, there is a book by William O Neil on shortselling which states that one has to see four five distribution days-price closing lower than previous close at higher volumes over a span of two to three weeks followed by a decline in price over 50day moving average. If it goes below 200EMA, it could be the confirmation of the onset of a bear market?
I wish it were that easy to predict stuff. I have read William O’ Neil’s books. His volume concepts are in general good but you cannot make it that precise. But O’Neil’s techo-fundamental concepts are solid .
>>Considering that the distribution question mentioned above is on daily charts, isn’t the new high new low monthly rather late in the day? Can’t it be done faster?
Not sure I understand what you mean. I think monthly NH-NL chart will give warnings much earlier than distribution analysis. Try to test O’Neil’s distribution stuff on historical data it doesn’t work as expected. Even NH-NL stuff doesn’t work many times. All these including O’Neil’s stuff are just warnings not signals. If you want warnings much faster than monthly NH-NL the market participation chart gives them.
>>In India it should be just the nifty and sensex?
SENSEX is a meaningless index like DOW in US. People & amatuers follow it not seasoned traders. It is highlighted in the media or in newsletters only for benefit of the general investing public. It only has psychological significance. NIFTY is a slightly broad based index than SENSEX and is important more so because its futures contracts are traded actively. CNX 500 is a very important index for analysis of real market trends because it represents greater than 90% of the market.