Technical Analysis: Why the A/D Line is Essential

When it comes to technical analysis, it’s very easy to become overwhelmed with the shear number of indicators. Everything from Bollinger Bands and MACD, to moving averages and accumulation/distribution lines can make even the most seasoned pros a bit cross-eyed and batty after awhile.

However, with practice, it’s becomes easier.

So far, we’ve talked a lot about Bollinger Bands, MACD, candlestick patterns, Parabolic SAR, relative strength (RSI) and even Williams’ %R.  Another essential one is known as A/D.

Accumulation/Distribution Line (A/D Line)

The A/D line is a momentum indicator that is associated with changes in both price and volume.  It’s based on the idea that the more volume that accompanies a move in the stock itself, the more significant the move. 

In addition, divergences in the A/D and the stock can tell us a change in direction may be imminent.  For example, if the price of the stock is moving higher, but the A/D line is moving lower, it can imply the direction of the stock may soon shift lower.

There are four key things to watch for with A/D.

  • If both the price of stock and A/D are moving higher, the uptrend is likely to continue. 
  • If both the price of stock and A/D are moving lower, the downtrend is likely to continue. 
  • If the price of the stock is making a new high, yet A/D is failing, the uptrend may be dying, which is referred to as negative divergence.
  • Or, if the price of the stock is making new lows, and A/D is recovering, it may be a sign that a new uptrend may soon follow.  This is known as positive divergence. 

Unfortunately, as we’re all aware, there is not such thing as the “Holy Grail” of technical indicators.  For that reason, we cannot rely on a single indicator, such as A/D.  Instead, we need to confirm our findings with other tools, such as the Bollinger Bands, Williams’ %R, MACD and even Money Flow.  Still, it’s a tool worth watching always.

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One of the biggest arguments we run across is that market technicals aren’t healthy. 

But if we look beneath the surface, that doesn’t appear to be the case at all.  In fact, if we look at the A/D line on the NYSE for example the line clearly told us more stocks are advancing than declining, which is a sign of health in the market, as of early October 2017.  As you can see in the chart below, the NYSE A/D line was hitting an all-time high at the time.

The only times we’ve seen this indicator break down slightly was in 2007.  The fact that it’s now at such highs is a positive for the bulls.

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