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(I posted this to another list. Basically, the discussion had to do with
refining the A/D line, for example only tracking the stocks in the S&P 500.
This is a reply to a question that I raised, as to whether the A/D line has any
particular predictive power above and beyond a straight price oscilator.)
This is a follow-up on the following idea:
>
> 3) The idea of watching the A/D presupposes that it has predictive value on
> where the underlying index is going. Notably, it should point to oversold and
> overbought conditions. How reliable is it? Bill and others have offered some
> thoughts on how to use the A/D line, but the larger question is why would the
> A/D line give a truer picture of the market index in question than
> simply, for
> example, summing up the %-changes over a given timeframe. Chande (I think)
> popularized an oscilator that was basically:
> A / (A + D)
> where A is the daily (weekly, whatever) percent positive changes and
> D was the
> daily percent negative changes. Would this oscilator look much different if
> stand advance/decline data were substituted for A/D instead?
>
See attached chart, with the Nasdaq Composite in the top sub chart, an
indicator showing the new highs as a percentage of (new highs + new lows) over
the past 20 trading days in the middle chart. The bottom sub-chart shows an
oscilator (in red) similar to the $NASI, or McClellan oscilator applied to the
Nasdaq; this oscilator shows the number of OTC advances over (OTC advances +
OTC declines) ove the past 20 days, expressed as a percentage. The line in
green is the sum of positive %-changes of the Nasdaq Compositie divided by the
absolute value of all %-changes, expressed as a percentage. Thus, the green
line is a function of Nasdaq price only, and the red line is a function of the
A/D statistics. Note that the green price oscilator line is in close agreement
with the red A/D oscilator, though the green line is a bit "noisier". Also,
note that the New Hi/Low oscilator seems a better indicator of relative levels
of oversold or overbought. The New Hi/Low indicator isn't showing a sufficient
level of oversold to signal a significant, tradeable bottom, yet.
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