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Last month, I showed you how lots of stocks had been participating in upside moves, not just the FANGMA – Facebook Inc. (Nasdaq: FB), Apple Inc. (Nasdaq AAPL), Netflix Inc. (Nasdaq: NFLX), Google/Alphabet Inc. (Nasdaq: GOOGL), Microsoft Corp. (Nasdaq: MSFT), and Amazon.com Inc. (Nasdaq: AMZN) – heavyweights.
Now, I've likened breadth, which I'll tell you a little more about, to my "canary in the coal mine." And by far my favorite way to see whether the canary starts to feel queasy is by watching the cumulative advance/decline line.
As a quick reminder, this indicator starts with a daily breadth number. Breadth is the number of stocks on the New York Stock Exchange that closed higher than yesterday minus the number that closed lower. That's where the term advance/decline comes from.
When we add up that breadth number day after day, we "accumulate" the daily breadth numbers, giving us a cumulative advance/decline (A/D) line.
Most of the time, when the market goes up or down, the cumulative A/D line moves in lockstep.
Conceptually, the reason why this is an important metric is very straightforward as well. If only a few stocks are pulling the market up, then it only takes one of those stocks to fall hard to send the market spiraling.
So far, the market's resisted doing that. But I'm seeing things that suggest we may be in for, if not a huge move down, then some decidedly more up-and-down action before long.
Have a look at these charts…
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.