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A Tale of Two Nasdaq Lines – The AD Line versus the AD Volume Line

The Nasdaq AD Line is not keeping pace with the Nasdaq Composite, but this is not necessarily bearish. Note that the Nasdaq hit a new high in July and again on November 1st, even though the Nasdaq AD Line has been falling since April. How can this be, what does it tell us and why is it not bearish?

First and foremost, note that the Nasdaq has some 3200 listed stocks ($NATOT) and the listing requirements are not as stringent as they are on the NYSE ($NYTOT). This means there are quite a few “debatable” listings on the Nasdaq and this is reflected in the AD Line. All stocks are equal in the eyes of the AD Line because an advance counts as +1 and a decline counts at -1, regardless of market cap or listing quality. This means an advance in AAPL counts the same as an advance in Ruhnn Holdings (RUHN), which is listed in China and has a market cap of 454 million. You may want to watch “The China Hustle [1]” before you consider investing in RUHN.

The chart below shows the Nasdaq, the Nasdaq AD Line and the NYSE AD Line. The Nasdaq AD Line is currently near its 2010 peak and has pretty much moved sideways for 10 years. In contrast, the Nasdaq is up over 200% the last ten years and the NYSE AD Line shows a consistent rise. The Nasdaq Composite is a market cap weighted index where the biggest stocks drive the index. Thus, the index can, and often does, rise on days when declines outpace advances.

The Nasdaq AD Line is not useless though. Because of the relatively easy listing requirements, the AD Line provides a good litmus tests for the risk appetite in the stock market. There are basically two types of advances in the Nasdaq Composite: selective advances and indiscriminate advances.

The market is more selective when the Nasdaq AD Line declines and the Nasdaq rises, which occurred from 2010 to 2012, April 2014 to March 2016 and over the last six months. The market is more indiscriminate (risk on big time) when the AD Line and the Nasdaq are rising together, which occurred in 2013 and from March 2016 to August 2018. These were the glory days! Almost everything went up and everyone looked like a genius.

Chartists looking for directional clues on the Nasdaq should monitor the price chart for the index and the AD Volume Line. The chart below shows the Nasdaq consolidating with a triangle after the new high in July. This is a consolidation within an uptrend and it is a bullish continuation pattern. The recent breakout signaled a continuation of the overall uptrend and this week’s new high is bullish.

In contrast to the Advance-Decline Line, which peaked in early May and trended lower the last six months, the AD Volume Line moved higher the last six months and recorded a new high in October. The AD Volume Line measures net buying pressure by subtracting the volume of declining issues from the volume of advancing issues. By using volume, the AD Volume Line also filters out thinly traded stocks and emphasizes the higher volume issues, which tend to be higher quality listings.

Of note, a recent scan showed over 800 Nasdaq stocks with average volume below 50,000 shares per day. 800 stocks multiplied by 50,000 shares is 40 million shares total. For reference, Microsoft averages 28 million shares per day and Apple averages 28 million shares. The AD Volume Line captures the Nasdaq leaders and provides a better indication of Nasdaq performance. We should worry when the AD Volume Line breaks its October low and 200-day SMA.