MCCLELLAN SUMMATION INDICES EXCEED JANUARY HIGHS - NET ADVANCES VERSUS NET ADVANCING VOLUME - NYSE AD LINE CONTINUES ITS RUN - NYSE AD VOLUME LINE HITS NEW HIGH - NASDAQ AD VOLUME LINE EXCEEDS 2007 HIGH - SHORT-TERM BREADTH WEAKENS

MCCLELLAN SUMMATION INDICES EXCEED JANUARY HIGHS... Link for todays video. There are many ways to measure breadth. AD Lines and AD Volume Lines are two of the purest breadth indicators. The raw data goes through relatively little manipulation and the formula is simple. While the McClellan Oscillator and Summation Index are useful for breadth momentum, they are second derivative indicators. This means the McClellan Oscillator is an indicator of an indicator. The McClellan Oscillator is the 19-day EMA of Net Advances less the 39-day EMA of Net Advances. The McClellan Summation Index is actually a third derivative because it is an indicator of an indicator of an indicator. It is a cumulative measure of the McClellan Oscillator. Click here to learn more about the McClellan indicators. Chart 1 shows the Nasdaq McClellan Summation Index bottoming near its November low and turning up sharply in February. It is nearing the August-September highs. Chart 2 shows the NYSE McClellan Summation Index turning up in mid February and recently breaking the January high. These indicators are in good shape as long as they hold above their 10-day moving averages (pink dotted lines). Incidentally, readers can click on any of the charts below to see a live version with settings. SharpCharts subscribers can even save these charts to a favorites list.

Chart 1

Chart 2

NET ADVANCES VERSUS NET ADVANCING VOLUME... The AD Line is based on Net Advances and the AD Volume Line is based on Net Advancing Volume. Net Advances is simply advancing stocks less declining stocks. Net Advancing Volume is the volume of advancing stocks less the volume of declining stocks. The AD Line moves higher when advances exceed declines and lower when declines exceed advances. The same principle holds for the AD Volume Line.

Before looking at these indicators, lets consider the information conveyed by Net Advances and Net Advancing Volume. Net Advances reflects the degree of participation. Net Advances expand as more stocks participate in an advance. Because all stocks are treated equal, Net Advances favors small and mid cap stocks because these far outnumber large-cap stocks. Regardless of market cap or volume, an advance counts as +1, a decline counts as -1 and unchanged counts as 0. There are few unchanged issues these days since decimalization. Net Advancing Volume, on the other hand, favors stocks with the highest volume, which tend to be large-caps. Look at the 20 most active lists for the NYSE and Nasdaq to see which stocks are driving Net Advancing Volume.

NYSE AD LINE CONTINUES ITS RUN... The AD Lines and AD Volume Lines can be overlaid behind the price plot to confirm or refute price action of the underlying. Chart 3 shows the NY Composite with the AD Line over the last 13 months. The AD Line broke above its January high in late February and recorded a succession of new highs in March. Participation within the NYSE is strong and there are no signs of weakness in the AD Line. Notice that a small positive divergence formed in June-July. This occurs when the underlying index forms a lower low, but the indicator makes a higher low. The indicator showed less weakness and this foreshadowed the July bottom. A negative divergence in the coming weeks or months could foreshadow a pullback in the NY Composite.

Chart 3

NYSE AD VOLUME LINE HITS NEW HIGH... Chart 4 shows the NYSE AD Volume Line lagging somewhat, but breaking out to a new high this month. There is no sign of a negative divergence and no signs of weakness at the moment. Think of the AD Volume Line as buying pressure. After all, this indicator represents volume, which is fuel for the market. Total volume is not an issue here. The AD Volume Line is only concerned with the difference between advancing volume and declining volume. The market can continue moving higher on light volume as long as advancing volume (buying pressure) continues to outpace declining volume (selling pressure).

Chart 4

NASDAQ AD VOLUME LINE EXCEEDS 2007 HIGH... In contrast to its NYSE counter part, the Nasdaq AD Line has a long-term negative bias. Chart 5 shows the Nasdaq AD Line (black) and the Nasdaq AD Volume Line (green). Notice how the AD Line declined as the Nasdaq advanced from 2003 to 2007. The decline accelerated when the Nasdaq declined in 2008. This negative bias stems from less stringent listing requirements and higher risk stocks (think small biotech or tech start ups). In contrast to the AD Line, the AD Volume Line kept pace with the Nasdaq quite well. Notice that the AD Volume Line even moved above its 2007 high this month. Large-caps within the Nasdaq are on a tear. Chart 6 shows the Nasdaq AD Volume Line in more detail.

Chart 5

Chart 6

Even though the Nasdaq AD Line has a long-term negative bias, it can still be used for short-term, and sometimes medium-term, moves. Chart 7 shows the AD Line bottoming in February and surging to its Sep-Oct highs. Notice how the AD Line recouped four months of losses in just five weeks. Talk about a surge. With a move from +2000 to around +12000, the AD Line is up +10000 Net Advances since early February. This compares to the March-April surge when the AD Line surged from -12000 to 0 in five weeks. While the recent five week surge is certainly impressive, it also signals a return to more speculative issues. Speculation often surges just before a pullback or market top. Note that the starting point for the AD Line scale depends on the starting date for the calculation.

Chart 7

BREADTH NARROWS THIS WEEK... As noted above, the AD Lines and AD Volume Lines are good medium-term or long-term indicators. The bulls are in control of the bigger trends as long as these indicators are trending up and hitting new highs. Even though there are no signs of weakness in these indicators, a look beneath the surface shows some narrowing breadth over the past week. This is potentially short-term negative, especially with stocks overbought after an extended run. Chart 8 shows the Nasdaq with Net Advances and Net Advancing Volume on a daily basis. Readings at or above +1000 show strength. Net Advances ended at +659 on Tuesday and Net Advancing Volume finished at +643. These readings are well below +1000 and below the levels seen the first two weeks of March. Fewer Net Advances shows narrowing participation. Lower Net Advancing Volume shows diminishing buying pressure.

Chart 8

Chart 9 shows the NYSE with Net Advances and Net Advancing Volume. The orange areas mark the strong breadth band. Breadth is considered strong when Net Advances and/or Net Advancing Volume surge into this band. From early February until early March, there were a number of strong breadth surges into these bands. NYSE Net Advances ended at +1398 on Tuesday, which just hit the lower edge of the band. Net Advances were by no means weak, but were below the levels seen earlier in March. Net Advancing Volume ended at +665 on Tuesday. Again, this indicator moved to the bottom of the strength band. Net Advancing Volume was not weak, but it could have been stronger.

Chart 9