AI
Sunday, July 31, 2011 3:57:51 AM
No-- the A/D line is showing retail is trying to support the price (catching a falling knife) IMO. The bullish divergence is a result of how A/D is calculated.
A/D is calculated based on the closing price of the stock irrespective of the previous close. In other words, it "isolates" the trading day for the initial calculation. If the price at the end of the day is in the upper-half of the day's range, the volume is given a positive multiplier. Likewise if it is lower, it is given a negative multiplier. The resulting number is added to the previous day's number (cumulative).
You can see the issue with this approach readily on gaps (e.g. 7/21 trading) and as I have stated previously, is susceptible to skewing from EoD paints. It is not a reliable indicator for OTC stocks given the ease of price "tinkering."
The heavy volume gap and drop on 7/21 was considered positive by A/D calculations since the closing price of $2.00 was above the mid-range for the day at $1.945. This despite a close down -$0.62 (-23.66%) from the previous day's close. If it were negative, such as OBV was (given its calculation relies on the end position [last trade] from close to close), the follow-on trading days would have showed the "natural" flow of drop/level. This still would suggest retail support, just not nearly as dramatic as seeing the bullish divergence.
The chart shows the difference between a low-end close on 7/14 -vs- a high-end close on 7/21
A/D is calculated based on the closing price of the stock irrespective of the previous close. In other words, it "isolates" the trading day for the initial calculation. If the price at the end of the day is in the upper-half of the day's range, the volume is given a positive multiplier. Likewise if it is lower, it is given a negative multiplier. The resulting number is added to the previous day's number (cumulative).
You can see the issue with this approach readily on gaps (e.g. 7/21 trading) and as I have stated previously, is susceptible to skewing from EoD paints. It is not a reliable indicator for OTC stocks given the ease of price "tinkering."
The heavy volume gap and drop on 7/21 was considered positive by A/D calculations since the closing price of $2.00 was above the mid-range for the day at $1.945. This despite a close down -$0.62 (-23.66%) from the previous day's close. If it were negative, such as OBV was (given its calculation relies on the end position [last trade] from close to close), the follow-on trading days would have showed the "natural" flow of drop/level. This still would suggest retail support, just not nearly as dramatic as seeing the bullish divergence.
The chart shows the difference between a low-end close on 7/14 -vs- a high-end close on 7/21
