Bullish and bearish divergences in the AD Line often precede significant bottoms and tops. Even though reversals are certainly possible when the AD Line is keeping pace, they are the exception rather than the rule. (Note: The Advance Decline Line is a cumulative measure of advancing issues less declining issues).
As the chart above shows, a large bullish divergence preceded the August low as the NYSE Composite formed an equal low and the AD Line formed a sharply higher low. In addition, a smaller bullish divergence formed in April and May. This foreshadowed the May low and led to a strong advance over the last few months.
The AD Line has been keeping pace with the index since May and shows no signs of divergence (weakness). Both the NYSE Composite and the AD Line recorded new highs this week. Strength in the AD Line reflects broad participation. The bull market may seem old and tired, but there is no evidence of weakness or lack of participation in the AD Line.
