The AD and Tick Ratio Adjusted McClellan Summation Indices (RASI) relationships have discussed before on TW, but it has been a while so here goes.
Background: By knowing the daily closing advances and declines of a market (NYSE and Nasdaq in this exercise), one can derive a reasonable estimate of the number of stocks closing on an uptick and the number of issues closing on a down tick by constructing two equations with two unknowns (closing upticks and down ticks), then solve for the two unknowns. By knowing the closing index components' upticks and down ticks, indicators such as the McClellan Oscillator (MCO) and RASI can be calculated.
By subtracting the Tick RASI from the AD RASI, one can then determine if the breadth trend is stronger than the more positively biased tick behavior. The same technique with the AD and Tick MCOs as well as the MCO's components, the 10% trend (19 day EMA) and 5% trend (39 day EMA).
If the resulting difference of any of the indicator pairs is rising, the AD indicator is gaining in relative strength with respect to the tick indicator, usually coinciding with rising prices. Conversely, if the difference between the AD indicator and tick indicator is declining, prices typically have difficulties with rallying.
First is the Nasdaq AD-Tickq 10% trend difference, which usually reacts quickly to the behavior of the internals and is a shorter term tool. About a week ago, this tool turned down proving a short term sell signal. To support the bullish case for the intermediate term, the 10% trend AD-Tickq indicator will need to continue its higher-high/higher low pattern and remain above its support trendline.
The Nasdaq AD-Tickq 5% trend indicator remains in an IT uptrend, but like its faster reacting 10% trend cousin, gave a sell signal early last week. As long as this indicator continues its so-far-healthy uptrend, price damage should remain minimal.
The Nasdaq AD-Tickq RASI, serving as an intermediate term tool, gave a later than usual buy signal in October, but remains in an uptrend suggesting the Nasdaq internals are still exhibiting sufficient relative strength to support continued IT price appreciation.
Note early in the current LT bull run, the AD-Tickq RASI achieved an unusually high level signaling an initiation thrust upmove in the works. Data going back to 1998 suggests the current range of this indicator is normal, and the early 2003 thrust was very unusual. Due to the graphical presentation problems of Nasdaq bubble-level prices, the following chart is from late 2002.
This indicator needs to challenge and preferably break its dashed-blue resistance line to support further, substantial price appreciation.
The NYSE AD-Tick 10% trend indicator also gave a rather sharp short term sell signal early last week. Until late November, this indicator had been contained by the black-dashed resistance line since May 2005, reflecting the relative weakness in the NYSE composite breadth over the past six months. This indicator will need to remain above its young support trendline to support the internals strength necessary for further price appreciation in the NYSE indices.
A side-note with respect to breadth behavior over the past six months in the NYSE: there are 3700 total issues traded on the NYSE of which only 2060 are common stocks. The remaining 1600+ issues are mostly very sensitive to interest rates, and the common stock AD indicators have exhibited superior relative strength over the composite AD issues over the past six months.
The NYSE composite AD-Tick 5% trend indicator has also generated a short term sell signal and like its 10% trend cousin, was able to break through it controlling resistance trendline in November. To support further price appreciation for the majority of stocks traded on the NYSE, this indicator will need remain in its young uptrend.
The NYSE intermediate term AD-tick RASI indicator remains in a grinding uptrend, but will need to continue so for the bullish case. Note this indicator recently successfully tested its low in the fall of 2002, but falling to the depths the indicator posted in October is likely a longer term warning for the bull market. If breadth behavior for the composite NYSE doesn't regain its recent strength in the next couple of weeks, intermediate sell signals will likely be generated.
Looking back to 1996, the NYSE AD-Tick RASI indicator is likely in the process of repeating the lower-low pattern carved out in the 1997-1999 time frame. Like other longer-term internals-related indicators, the AD-tick RASI tool is suggesting liquidity is waning in the NYSE.
The Nasdaq AD-tick indicators are exhibiting more favorable relative strength than the NYSE variants, which is good for the intermediate term, but is a warning for the longer term. In the near term, further price deterioration will need to generate some doubt with the bulls, or the "healthy" correction could turn into something worse. For the bullish case, breadth, particularly in the NYSE, will need to regain its recent strength to keep the uptrend intact once the current consolidation/correction runs its course.