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Telltale Signs of a Correction

Posted by on Jun 10, 2016

Telltale Signs of a Correction

In over thirty years of following the markets it has become clear that deterioration in the daily advance/decline lines should not be ignored. In some instances the new downtrends in just the daily A/D lines coincide with a period of consolidation in the major averages. They are ultimately resolved by a resumption of the market’s overall up trend.

In other instances the daily deterioration can lead to a more pronounced market correction than can result in the weekly A/D analysis also turning negative. This can change a 3-5% market correction into a double-digit slide. In this trading lesson I will focus on the multiple time frame analysis of the A/D lines.

figa

This example from 2014 shows how a market’s loss of momentum can warn of something more. In August 2014 the NYSE started to bottom out as the A/D line moved above its WMA just two days after the lows which was the start of a nice rally that continued into early September.

On September 8th, the NYSE A/D line dropped below its previous low after failing to make a new high. This started a new downtrend which put the market in the correction mode. Two days later the more important support at line a, was broken even though the NYSE had just pulled back to its 20 day EMA.

figaa

After drifting lower for a few days the NYSE rebounded back to the Sept. 8th highs (chart next page) but the NYSE A/D line had weakened further as it was in a clear downtrend and well below its WMA This confirmed the rebound was weak. By September 26th the weekly A/D dropped below its WMA which was a sign of further weakness. Fourteen days later the NYSE made its low as it had dropped 9.9% from the early September high.

Four days after the lows on October 21st I commented in Forbes that the A/D lines had moved through first resistance. This was a sign that the A/D line analysis had turned positive.

fig1

The next period I would like to discuss is the first correction that occurred after the bottom in the stock market was confirmed in 2003. The weekly A/D line broke out to new highs in April 2003 (point 1) after moving above its WMA several weeks earlier.

The A/D line came down to test its WMA in August as the S&P 500 had consolidated for six weeks. The A/D line led prices higher out of the consolidation period and formed a series of higher high and higher lows.

The week ending March 12, 2004, the S&P 500 dropped sharply and closed below the doji low triggering a sell signal (see circle). The pullback was brief as the S&P 500 quickly rebounded to challenge its highs. The weekly A/D line ….

New subscribers to either the Viper ETF Report or the Viper Hot Stocks Report  for just $34.95 each per month get the full nine page report on Advance/Decline analysis as well as these four recent trading lessons.

Finding The Best Entry Levels

Finding A Good Exit Price

Profiting From Pivot Analysis

Multiple Price Entry Strategy

Trading Lessons are an important part of both service and are sent out every few weeks. There are designed to help subscribers better understand the markets. They are quite detailed with many specific examples.