Don't Ignore This Chart!

Is The Current S&P 500 Rally Sustainable? Don't Decide Based On These Two Indicators Alone

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Everyone is trying to evaluate the strength and sustainability of the current U.S. equity rally.  StockCharts.com provides us the tools to do just that.  But not every indicator tells us the complete truth.  A look at the most recent drop in the S&P 500 and subsequent rally exemplifies this point.  The accumulation/distribution line (ADL) and on balance volume (OBV) both attempt to provide us an interpretation of the strength of directional movement in our major indices, ETFs, stocks, etc. by using volume-based analysis.  The problem is, they use different formulas and can provide very different results, especially in volatile markets.  As an example, let's review the S&P 500 over the past several months and compare these two indicators:


There's a great article in ChartSchool that explains how these two indicators, both attempting to measure market strength/weakness, produce very different results and conclusions.  CLICK HERE to review.

These two indicators produce different views in volatile markets where opening prices vary greatly from prior closes.  The ADL indicator ignores prior closing prices and instead focuses on where price ends relative to its range for the current period.  Therefore, significant gaps lower can still result in the ADL rising if prices rally during the session and finish well off earlier lows.  The OBV, however, views this behavior bearishly if the current close is below the prior close, regardless of how much price rallies during the period.  That's how these two indicators can move opposite one another.

While my preference would be to use the OBV, the conclusion to be reached here is that neither of these indicators should be relied upon individually.  Instead, their signals should be part of a trading strategy where they either confirm or refute other technical indicators.

Happy trading!

Tom

 

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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