The basic premise of intermarket analysisis that all financial markets are linked in some way. That includesThe Link Between Stocks and Futures: Intermarket Analysis 415
 
international markets as well as domestic ones. Those relation-ships may shift on occasion, but they are always present in oneform or another. As a result, a complete understanding of what’sgoing on in one market—such as the stock market—isn’t possiblewithout some understanding of what’s going on in other markets.Because the markets are now so intertwined, the technical analysthas an enormous advantage. The technical tools described in thisbook can be applied to all markets, which greatly facilitates theapplication of intermarket analysis. You'll also see why the abilityto follow the charts of so many markets is a tremendous advan-tage in today’s complex marketplace.
PROGRAM TRADING:THE ULTIMATE LINK
Nowhere is the close link between stocks and futures more obviousthan in the relationship between the S&P 500 cash index and theS&P 500 futures contract. Normally, the futures contract trades ata premium to the cash index. The size of that premium is deter-mined by such things as the level of short term interest rates, theyield on the S&P 500 index itself, and the number of days until thefutures contract expires. The premium (or spread) between S&P500 futures over the cash index diminishes as the futures contractapproaches expiration. (See Figure 17.1.) Each day, institutions cal-culate what the actual premium should be—called fair value. Thatfair value remains constant throughout the trading day, butchanges gradually with each new day. When the futures premiummoves above its fair value to the cash index by some predeter-mined amount, an arbitrage trade is automatically activated—called program buying. When the futures are too high relative to thecash index, program traders sell the futures contract and buy a bas-ket of stocks in the S&P 500 to bring the two entities back into line.The result of program buying is positive for the stock market sinceit pushes the S&P 500 cash index higher. Program selling is just theopposite and occurs when the premium of the futures over thecash narrows too far below its fair value. In that case, program sell-ing is activated which results in the buying of S&P 500 futures and416 Chapter 17
 
(*SPX) S&P 500 Stock Index
 
S&P 500 Futures
 
™
S&P 500 Cash
 
 
 
 
 
Figure 17.1 S&P 500 futures normally trade at a premium to the cashindex as shown in this chart. Notice that the premium narrows as the Marchcontract nears expiration.
selling of the basket of stocks. Program selling is negative for themarket. Most traders understand this relationship between the tworelated markets. What they don’t always understand is that thesudden moves in the S&P 500 futures contract, which activate theprogram trading, are often caused by sudden moves in otherfutures markets—like bonds.
THE LINK BETWEEN BONDSAND STOCKS
The stock market is influenced by the direction of interest rates. Thedirection of interest rates (or yield) can be monitored on a minute-to-minute basis by tracking the movements in the Treasury Bondfutures contract. Bond prices move in the opposite direction ofThe Link Between Stocks and Futures: Intermarket Analysis 417
 
interest rates or yields. Therefore, when bond prices are rising,yields are falling. That is normally considered positive for stocks.*Falling bond prices, or rising yields, are considered negative forstocks. From a technician’s point of view, it is very easy to comparethe charts of Treasury Bond futures with the charts of either theS&P 500 cash index or its related futures contract. You'll see thatthey have generally trended in the same direction. (See Figure 17.2.)On a short term basis, sudden changes in trend in the S&P 500futures contract are often influenced by sudden changes in theTreasury Bond futures contract. On a longer range basis, changes inthe trend of the Treasury Bond contract often warn of similar turnsin the S&P 500 cash index itself. In that sense, bond futures can beviewed as a leading indicator for the stock market. Bond futures, inturn, are usually influenced by trends in the commodity markets.
* In a deflationary environment, bonds and stocks usually decouple. Bond prices rise whilestock prices fall.
 
(TR1600) Treasury Bonds 1600
 
S&P 500 Index
 
 
 
oe ee ey be bw & See eeTAT TE Fipen Ped re a7
 
 
Figure 17.2 Rising bond prices are usually good for stock prices. Thebond market bottoms in 1981, 1984, 1988, 1991, and 1995 led to majorupturns in stocks. Bond peaks in 1987, 1990, and 1994 wamed of bad stockmarket years.418 Chapter 17
THE LINK BETWEEN BONDSAND COMMODITIES
Treasury Bond prices are influenced by expectations for inflation.Commodity prices are considered to be leading indicators of infla-tionary trends. As a result, commodity prices usually trend in theopposite direction of bond prices. If you study the market’s histo-ty since the 1970s, you'll see that sudden upturns in commoditymarkets (signaling higher price inflation) have usually been asso-ciated with corresponding declines in Treasury Bond prices. Theflip side of that relationship is that strong Treasury Bond gainshave normally corresponded with falling commodity prices. (SeeFigure 17.3). Commodity prices, in turn, are impacted by thedirection of the U.S. dollar.
 
317105 (TR1600) Treasury Bonds 1600
 
CRB Index
pi1286
broom
T-Bonds
 
 
 
 
 
 
Figure 17.3. Commodity prices and bond prices normally trend in oppo-site directions as shown here. The bond bottoms in the spring of 1996 and1997 coincided with major peaks in commodity prices (see boxes).The Link Between Stocks and Futures: Intermarket Analysis 419
THE LINK BETWEEN COMMODITIESAND THE DOLLAR
A rising U.S. dollar normally has a depressing effect on most com-modity prices. In other words, a rising dollar is normally consid-ered to be noninflationary. (See Figure 17.4.) One of the com-modities most effected by the dollar is the gold market. If youstudy their relationship over time, you'll see that the prices ofgold and the U.S. dollar usually trend in opposite directions. (SeeFigure 17.5.) The gold market, in turn, usually acts as a leadingindicator for other commodity markets. So, if you're analyzingthe gold market, it’s necessary to know what the dollar is doing.If you're studying the commodity price trend in general (using
 
(*CRB) Commodity Research Bureau
 
US Dollar Index
 
 
CRB Index
wow § 6 7 be 9 bo 01 & > ™ bs be 7ai Per ag a BO
 
 
 
Figure 17.4 A rising dollar normally has a depressing effect on commod-ity markets. In 1980, the dollar bottom coincided with a major peak in com-modities. The dollar bottom in 1995 contributed to a sharp decline in com-modities a year later.420 Chapter 17
         
 
(*UDX) Us Dollar Index\ Gold
 
     
US Dollar Index
 
 
 
 
 
ET EE aroar
Figure 17.5 The U.S. Dollar and gold prices usually trend in oppositedirections as shown in this example. Gold prices, in turn, usually lead othercommodities.
one of the better known commodity price indexes), it’s necessaryto know what the gold market is doing. The fact of the matter isthat all four markets are linked—the dollar influences commodi-ties, which influence bonds, which influence stocks. To fully com-prehend what’s happening in any one asset class, it’s necessary toknow what's happening in the other three. Fortunately, that’s eas-ily done by simply looking at their respective price charts.
STOCK SECTORS ANDINDUSTRY GROUPS
An understanding of these intermarket relationships also shedslight on the interaction between the various stock market sectorsand industry groups. The stock market is divided into market sec-The Link Between Stocks and Futures: Intermarket Analysis 421
tors which are then subdivided into industry groups. These mar-ket categories are influenced by what’s happening on the inter-market scene. For example, when bonds are strong and com-modities weak, interest rate-sensitive stock groups—such as theutilities, financial stocks, and consumer staples—usually do wellrelative to the rest of the stock market. At the same time, infla-tion-sensitive stock groups—like gold, energy, and cyclicalstocks—usually underperform. When commodity markets arestrong relative to bonds, the opposite is the case. By monitoringthe relationship between Treasury Bond prices and commodityprices, you can determine which sectors or industry groups willdo better at any given time.
Since there is such a close relationship between stock mar-ket sectors and their related futures markets, they can be used inconjunction with each other. Utility stocks, for example, areclosely linked to Treasury Bond prices. (See Figure 17.6.) Gold
 
(°PHU) Phix Util Index
 
PHLX Utility Index
T-Bonds
 
 
 
 
 
 
Figure 17.6 = There is usually very close linkage between bond prices andutilities. In addition, utilities often make their turns a little before bonds.422 Chapter 17
mining shares are closely linked to the price of gold. What’s more,the related stock groups often tend to lead their respective futuresmarkets. As a result, utility stocks can be used as leading indica-tors for Treasury Bonds. Gold mining shares can be used as lead-ing indicators for gold prices. Another example of intermarketinfluence is the impact of the trend of oil prices on energy and air-line stocks. Rising oil prices help energy shares but hurt airlines.Falling oil prices have the opposite effect.
THE DOLLAR AND LARGE CAPS
Another intermarket relationship involves how the dollar affectslarge and small cap stocks. Large multinational stocks can be neg-atively impacted by a very strong dollar, which may make theirproducts too expensive in foreign markets. By contrast, the moredomestically oriented small cap stocks are less affected by dollarmovements and may actually do better than larger stocks in astrong dollar environment. As a result, a stronger dollar may favorsmaller stocks (like those in the Russell 2000), while a weaker dol-lar may benefit the large multinationals (like those in the DowIndustrial Average.)
INTERMARKET ANALYSIS ANDMUTUAL FUNDS
It should be obvious that some understanding of these intermar-ket relationships can go a long way in mutual fund investing. Thedirection of the U.S. dollar, for example, might influence yourcommitment to small cap funds versus large cap funds. It mayalso help determine how much money you might want to com-mit to gold or natural resource funds. The availability of so manysector-oriented mutual funds actually complicates the decision ofwhich ones to emphasize at any given time. That task is made agood deal easier by comparing the relative performance of thefutures markets and the various stock market sectors and industrygroups. That is easily accomplished by a simple charting approachcalled relative strength analysis.The Link Between Stocks and Futures: Intermarket Analysis 423
RELATIVE STRENGTH ANALYSIS
This is an extremely simple but effective charting tool. All you do isdivide one market entity by another—in other words, plot a ratio oftwo market prices. When the ratio line is rising, the numerator priceis stronger than the denominator. When the ratio line is declining,the denominator market is stronger. Consider some examples ofwhat you can do with this simple indicator. Divide a commodityindex (such as the CRB Futures Price Index) by Treasury Bondfutures prices. (See Figure 17.7.) When the ratio line is rising, com-modity prices are outperforming bonds. In that scenario, futurestraders would be buying commodity markets and selling bonds. Atthe same time, stock traders would be buying inflation sensitivestocks and selling interest-rate sensitive stocks. When the ratio line
 
ber26/92 (*CRB) Commodity Research Bureau
 
CRB index (weekly)
 
 
CRB /T-Bonds Ratio
 
 
 
 
 
Figure 17.7. The CRB Index/Treasury Bond ratio tells us which assetclass is stronger. 1994 favored commodities, while 1995 favored bonds. Theratio took a sharp downturn in mid-1997 owing to the Asian crisis and fearsof deflation.424 Chapter 17
is falling, they would be doing the opposite. That is, they would sellcommodities and buy bonds. At the same time, stock investorswould be selling the golds, the oils, and the cyclicals, while buyingthe utilities, the financials, and consumer staples. (See Figure 17.8.)
 
 
(CYC/S&P) Cyclicals/S&P500
 
Cyclicals / S&P 500 Index Ratio
 
Consumer Staples / S&P 500 Index Ratio
 
 
 
 
 
 
Figure 17.8 During October 1997, the Asian crisis caused funds to flowout of cyclicals and into consumer staples, which coincided with a fallingCRB/Bond ratio in Figure 17.7.
RELATIVE STRENGTHAND SECTORS
Many exchanges now trade index options on various stock mar-ket sectors. The Chicago Board Options Exchange has the greatestselection and includes such diverse groups as automotive, com-puter software, environmental, gaming, real estate, healthcare,retail, and transportation. The American and Philadelphia StockExchanges offer popular index options on banks, gold, oil, phar-The Link Between Stocks and Futures: Intermarket Analysis 425
 
maceuticals, semiconductors, technology, and utilities. All ofthese index options can be charted and analyzed like any othermarket. The best way to use relative strength analysis on them isto divide their price by some industry benchmark such as the S&P500. You can then determine which are outperforming the over-ali market (a rising RS line) or underperforming (a falling RS line).Employing some simple charting tools like trendlines and movingaverages on the relative strength lines themselves will help youspot important changes in their trend. (See Figure 17.9.) The gen-eral idea is to rotate your funds into those sectors of the marketwhose relative strength lines are just turning up, and to rotate outof those market groups whose relative strength lines are just turn-ing down. Those moves can be implemented either with theindex options themselves or through mutual funds that matchthe various market sectors and industry groups.
 
(*PSE) Pacific High Tech Index
 
 
PSE / S&P 500 Index Ratio
 
 
 
 
 
Figure 17.9 A relative strength (ratio) comparison of the PSE High TechIndex to the S&P 500. Simple trendline analysis helped spot the downturn intechnology stocks during October 1997 and the upturn at year-end.426 Chapter 17
RELATIVE STRENGTH ANDINDIVIDUAL STOCKS
Investors have two ways to go at that point. They can simplyrotate their funds out of one market group into another and stopthere. Or, if they wish, they can continue on to choose individualstocks within those groups. Relative strength analysis plays a rolehere as well. Once the desired index has been chosen, the nextstep is to divide each of the individual stocks within the index bythe index itself. In that way, you can easily spot the individualstocks that are showing the greatest relative strength. (See Figure17.10.) You can purchase the stocks showing the strongest ratiolines, or you can buy a cheaper stock whose ratio line may just beturning up. The idea, however, is to avoid stocks whose relativestrength (ratio) lines are still falling.
 
(DELL) Dell Computer Corp
ili" ar
tpi
etches tlh at ftty , oe
| Mthi | ny gat cu Wh gli!Hyg
 
Dell / PSE High Tech Ratio
Relative Strength Breakout
 
 
 
 
 
 
Figure 17.10 A ratio analysis of Dell Computer versus the PSE HighTech Index at the end of 1997 showed Dell to be one of the better stock picksin the tech sector.The Link Between Stocks and Futures: Intermarket Analysis 427
TOP-DOWN MARKET APPROACH
What we’ve described here is a top down market approach. Youbegin by studying the major market averages to determine thetrend of the overall market. Then you select those market sectorsor industry groups that are showing the best relative strength.Then you select individual stocks within those groups that arealso showing the best relative strength. By incorporating inter-market principles into your decision making process, you canalso determine whether the current market climate favorsbonds, commodities, or stocks which can play a role in yourasset allocation decisions. The same principles can also beapplied to international investing by simply comparing the rel-ative strength of the various global stock markets. And, finally,all of these technical tools described herein can be applied tocharts of mutual funds as a final check on your analysis. All ofthis work is easily done with price charts and a computer.Imagine trying to apply fundamental analysis to so many mar-kets at the same time.
DEFLATION SCENARIO
The intermarket principles described herein are based on markettrends since 1970. The 1970s saw runaway inflation whichfavored commodity assets. The decades of the 1980s and 1990shave been characterized by falling commodities (disinflation)and strong bull markets in bonds and stocks. During the secondhalf of 1997, a severe downturn in Asian currency and stock mar-kets was especially damaging to markets like copper, gold, andoil. For the first time in decades, some market observersexpressed concern that a beneficial disinflation (prices rising at aslower level) might turn into a harmful deflation (falling prices).To add to the concerns, producer prices fell on an annual basisfor the first time in more than a decade. As a result, the bond andstock markets began to decouple. For the first time in four years,investors were switching out of stocks and putting more moneyinto bonds and rate-sensitive stock groups like utilities. The rea-428 Chapter 17
son for that asset allocation adjustment is that deflation changesthe intermarket scenario. The inverse relationship between bondprices and commodities is maintained. Commodities fall whilebond prices rise. The difference is that the stock market can reactnegatively in that environment. We point this out because it’sbeen a long time since the financial markets had to deal with theproblem of price deflation. If and when deflation does occur,intermarket relationships will still be present but in a differentway. Disinflation is bad for commodities, but good for bonds andstocks. Deflation is good for bonds and bad for commodities, butmay also be bad for stocks.
The deflationary trend that started in Asia in mid-1997spread to Russia and Latin America by mid-1998 and began tohurt all global equity markets. A plunge in commodity prices hadan especially damaging impact on commodity exporters likeAustralia, Canada, Mexico, and Russia. The deflationary impact offalling commodity and stock prices had a positive impact onTreasury bond prices, which hit record highs. Market events of1998 were a dramatic example of the existence of global inter-market linkages and demonstrated how bonds and stocks candecouple in a deflationary world.
INTERMARKET CORRELATION
Two markets that normally trend in the same direction, such asbonds and stocks, are positively correlated. Markets that trend inopposite directions, like bonds and commodities, are negativelycorrelated. Charting software allows you to measure the degree ofcorrelation between different markets. A high positive reading sug-gests a strong positive correlation. A high negative reading suggestsa strong negative correlation. A reading near zero suggests little orno correlation between two markets. By measuring the degree ofcorrelation, the trader is able to establish how much emphasis toplace on a particular intermarket relationship. More weight shouldbe placed on those with higher correlations, and less weight onthose closer to zero. (See Figure 17.11.)The Link Between Stocks and Futures: Intermarket Analysis 429
 
hor2gi93 (TR1600) Treasury Bonds 1600
 
T-Bonds
 
Bond / Stock Correlation
 
 
 
 
 
Figure 17.11 The line along the bottom shows the positive correlationbetween T-bond prices and the S&P5S00. During the second half of 1997,the Asian crisis caused an unusual decoupling. Investors bought bonds andsold stocks.
In his book, Cybernetic Trading Strategies, Murray Ruggiero,Jr. presents creative work on the subject of intermarket correla-tions. He also shows how to use intermarket filters on trading sys-tems. He demonstrates, for example, how a moving-averagecrossover system in the bond market can be used as a filter forstock index trading. Ruggiero explores the application of state-of-the-art artificial intelligence methods like chaos theory, fuzzylogic, and neural networks to the development of technical trad-ing systems. He also explores the application of neural networksto the field of intermarket analysis.
INTERMARKET NEURALNETWORK SOFTWARE
One major problem with the study of intermarket relationships isthat there are so many of them—and they’re all interacting at the430 Chapter 17
same time. That’s where neural networks come into play. Neuralnetworks provide a more quantitative framework for identifyingand tracking the complex relationships that exist among thefinancial markets. Louis Mendelsohn, president of Market Tech-nologies Corporation (25941 Apple Blossom Lane, Wesley Chapel,FL 33544; e-mail address: 45141@ProfitTaker.com; website URL:www.ProfitTaker.com/45141), was the first person to developintermarket analysis software in the financial industry during the1980s. Mendelsohn is the leading pioneer in the application ofmicrocomputer software and neural networks to intermarketanalysis. His VantagePoint software, first introduced in 1991, usesintermarket principles to trade interest rate markets, stock index-es, currency markets, and energy futures. VantagePoint uses neur-al network technology to detect the hidden patterns and correla-tions that exist between related markets.
CONCLUSION
This chapter summarizes the main points included in my book,Intermarket Technical Analysis. It discusses the ripple effect thatflows from the dollar to commodities to bonds to stocks.Intermarket work also recognizes the existence of global linkages.What happens in Asia, Europe, and Latin America has an impacton U.S. markets and vice versa. Intermarket analysis sheds light onsector rotation within the stock market. Relative strength analysisis helpful for seeking out asset classes, market sectors, or individ-ual stocks that are likely to outperform the general market. In hisbook, Leading Indicators for the 1990s, Dr. Geoffrey Moore showshow the interaction between commodity prices, bond prices, andstock prices follows a sequential pattern that tracks the businesscycle. Dr. Moore substantiates the intermarket rotation within thethree asset classes, and argues for their use in economic forecast-ing. In doing so, Dr. Moore elevates intermarket work and techni-cal analysis in general into the realm of economic forecasting.Finally, technical analysis can be applied to mutual funds like anyother market (with some minor modifications). That being thecase, all of the techniques discussed in this book can be appliedThe Link Between Stocks and Futures: Intermarket Analysis 431
 
right on the mutual fund charts themselves. Even better, the lowerdegree of volatility in mutual fund charts make them excellentvehicles for chart analysis. My latest book, The Visual Investor,deals more extensively with the subject of sector analysis and trad-ing, and shows how mutual funds can be charted and then usedto implement various trading strategies. (See Figure 17.12.)
 
(FSEAX) Fidelity Invt T Southeast A
 
 
 
 
Figure 17.12 Chart analysis can be done on mutual fund charts. Youdidn’t have to be a chart expert to see that Asia was headed for trouble bytracking this mutual fund.licators
 
MEASURING MARKET BREADTH
In the previous chapter, we described the top-down approach thatis most commonly employed in stock market analysis. With thatapproach, you begin your analysis with a study of the health ofthe overall market. Then you work down to market sectors andindustry groups. The final step is the study of individual stocks.Your goal is to pick the best stocks in the best groups in an envi-ronment when the stock market is technically healthy. The studyof market sectors and individual stocks can be accomplished withthe technical tools employed throughout this book—includingchart patterns, volume analysis, trendlines, moving averages,oscillators, etc. Those same indicators can also be applied to themajor market averages. But there’s another class of market indica-tors widely employed in stock market analysis whose purpose is todetermine the health of the overall stock market by measuringmarket breadth. The data used in their construction are advanc-ing versus declining issues, new highs versus new lows, and upvolume versus down volume.
433434 Chapter 18
SAMPLE DATA
If you check the Stock Market Data Bank section of The Wall StreetJournal (Section C, page 2) each day, you'll find the following datafor the previous trading day. The numbers shown are based on anactual day’s trading results.
 
Diaries
NYSE MondayIssues Traded 3,432Advances 1,327Declines 1,559Unchanged 546New highs 78New lows 43Adv vol (000) 248,215Decl vol (000) 279,557Total vol (000) 553,914Closing tick -135Closing Arms (trin) 96
The above figures are derived from New York StockExchange (NYSE) data. A similar breakdown is also shown for theNASDAQ and the American Stock Exchange. We’ll concentrateon the NYSE in this discussion. It just so happens that on thatparticular day the Dow Jones Industrial Average had gained 12.20points. So the market was up as measured by the Dow. However,there were more declining stocks (1,559) than advancing stocks(1,327), suggesting that the broader market didn’t fare as well asthe Dow. There was also more declining volume than advancingvolume. Those two sets of figures suggest that market breadthwas actually negative for that particular day—even though theDow itself closed higher. The other figures present a more mixedpicture. The number of stocks hitting new 52 week highs (78)was greater than those hitting new lows (43) suggesting a posi-tive market environment. However, the closing tick (the numberof stocks that closed on an uptick versus a downtick) was a neg-Stock Market Indicators 435
ative, -135. That meant that 135 more stocks closed on adowntick than an uptick, a short term negative factor. The nega-tive closing tick, however, is offset by a closing Arms (Trin) read-ing of .96 which is mildly positive. We'll explain why that is laterin the chapter. All of these internal market readings have oneintended purpose—to give us a more accurate reading on thehealth of the overall market that isn’t always reflected in themovement of the Dow itself.
COMPARING MARKET AVERAGES
Another way to study the breadth of the market is to compare theperformance of the stock averages themselves. Using the sameday’s trading as an example, the following data lists the relativeperformance of the major stock averages:
 
Dow Industrials +12.20 (+.16%)S&P 500 -.64 (-.07%)Nasdaq Composite -14.47 (-.92%)Russell 2000 -3.80 (-.89%)
The first thing that is clear is that the Dow Industrials wasthe only market average to gain on the day. On all the TV newsprograms that night, investors were told that the market (repre-sented by the Dow) was up for the day. Yet all the other measureswere actually down. Notice also that the broader the average (themore stocks included) the worse it did. Compare the percentagechanges. The 30 stock Dow gained .16%. The S&P 500 lost .07%.The Nasdaq Composite, which includes more than 5,000 stocks,was the day’s worst performer and lost .92%. Almost as bad as theNasdaq was the Russell 2000 (-.89%), which is a measure of 2000small cap stocks. The message in this brief comparison is thateven though the Dow gained on the day, the overall market lostground as measured by the more broader based stock averages.We'll revisit the idea of comparing market averages again. Butfirst, let’s show the different ways market technicians can analyzethe market’s breadth numbers.436 Chapter 18
THE ADVANCE-DECLINE LINE
This is the best known of the breadth indicators. The constructionof the advance decline line is extremely simple. Each day’s tradingon the New York Stock Exchange produces a certain number ofstocks that advanced, a number that declined, and a number thatremained unchanged. These figures are reported each day in TheWall Street Journal and Investor's Business Daily, and are used to con-struct a daily advance-decline (AD) line. The most common way tocalculate the AD line is to take the difference between the numberof advancing issues and the number of declining issues. If there aremore advances than declines, the AD number for that day is posi-tive. If there are more declines than advances, the AD line for thatday is negative. That positive or negative daily number is thenadded to the cumulative AD line. The AD line displays a trend ofits own. The idea is to make sure the AD line and the market aver-ages are trending in the same direction. (See Figure 18.1.)
 
Advancp-Deciine Line
 
 
 
 
 
ee oe ye faa baa fe Fea Tea
Figure 18.1. The NYSE advance-decline line versus the Dow Industrials.Ina healthy market, both lines should be trending upward together as theyare here.Stock Market Indicators 437
AD DIVERGENCE
What does the advance-decline line measure? The advance-decline line tells us whether or not the broader universe of 3500NYSE stocks is advancing in line with the most widely followedstock averages, which include only the 30 Dow Industrials orthe 500 stocks in the S&P 500. To