V.10:2 (75-76): The Lindsay A-D Indicator by Jerry Favors

The Lindsay A-D Indicator by Jerry Favors

The advance-decline line is handy for picking market tops, but lead time is a recurring problem, you say? Favors suggests this variation as an alternative to overcome that bothersome predicament. Most stude nts of te chnical analysis are familiar with the advance-decl ine line.To construct one, y ou simply begin with some base num ber and i f today's advances ex ceed decl ines for t he day, you add t he number of net advances (advances m inus decl ines) to that base num ber. If declines exceed advances for the day, you subtract the number of net declines (declines minus advances) from that base number . This same process is repeated each day and is then plotted along with a chart of the Dow J ones Industrial Average (DJIA). The theory is tha t if the DJIA moves to a new hig h but the advance/decline line does not, you have neg ative diver gence and a potential top. Contrary to popular opinion, the reg ular A-D line is not especially reliable at identifying importa nt ma rke t bottoms. While the A-D line does have an impre ssive record a t marke t tops, the question of lead time remains a nagging problem.

LEAD TIME EXAMPLE

Prior to the J uly 1990 top, the A-D line peaked on Aug ust 8, 1989. The DJIA did not see its final hig h until J uly 17, 1990, 11 months later . This question of lead time remains a bothersome deficiency for the daily A-D line. Technician Geor ge Lindsay used the advance-decline data dif ferently, in order to derive short-te rm buy or sell signals. Each day you will plot the difference between the advances and de clines for the day . For instance, if there are 1,000 advances and 600 declines, y our plot for that day is +400. If there are 900 declines and 400 advances, y our plot for the day becomes -500. A sell signal from this indicator requires a "triple zigzag pattern;" as illustrated in Figure 1.