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
Everything jimmenknee said is technically correct, but I don't agree with the context of his remarks.
First there is the use of the pejorative phrase "catching a falling knife". I think the JBII stockholders who added to their position during this period thought of it more like "it's raining money".
Second, the statement "A/D is calculated based on the closing price of the stock irrespective of the previous close." did not include the fact that when chart periods are changed the indicator is recalculated. You should always look at indicators from multiple time frames and perspectives.
If you look back at the chart I posted you will see that I focused on the period where the stock was going down. I did this because the impression I got from trading, and from the fact that this stock was going down in spite of improving fundamentals (the down trend started about two weeks before the Wells notice came out). When you focus on a larger chart you are getting additional data that does not pertain to the question I was asking.
What I was looking for was evidence of what my gut was telling me. Critics may say that is the wrong way to go about it, but you need to use multiple indicators and I think fundamentals has to be one of those indicators. My gut instinct was based on my knowledge of JBII fundamentals.
Yes, A/D can be painted, but so can OBV. Both have the same weakness on a daily basis. No one indicator is reliable enough to base an opinion on, it has to be a combination.
My confidence in the A/D line is also based on my observation of the intraday A/D in multiple time frames while this walkdown was happening. Confirmation of the daily A/D was gotten from the intraday which takes away the "paint" objection to the A/D. In fact, I think the intraday charts show that the more negative OBV that was painted, and there was an effort to bring down the stock end of day in order to reduce the strength of the A/D indicator and the daily candle pattern.
You also want to look at both the general trend of an indicator (achieved by drawing lines) and the details. I found the divot in the A/D line on the second chart, Friday's trading, to be fascinating. It appears to me that they tried to walk down the share price for end of day but someone was snapping up the shares as soon as they showed up on the ask.
Since this stock is low float it is easier to pass shares from the right hand to the left hand and make it appear that shares are being traded, but when a powerful buyer (or a significant group of small buyers) steps in and grabs those shares it messes up the planned trades.
During this downtrend the stock has repeatedly rebounded on buying instead of responding as most stocks do, going lower and lower as retail becomes frustrated. That is why the shorts are having trouble covering, as indicated by being on the SHO threshold list.
Chart reading is not an exact science, it's more of an art. When I started paying attention to the charts I looked at a hundred thousand or more charts. I actually had a method of downloading charts for about a hundred stocks with multiple indicators and multiple time frames each day. I also studied historical charts for stocks with a known outcome like GE and IBM. I could make six month charts charts going back in time and study them progressively. I can't do that now because I can't hit the chart site directly, they are filtered through aspx windows.
My advice is to paper trade based on charting focusing on the indicators you like the best, not too many of them or it will be confusing. If your paper trades aren't doing well, add another indicator and see if it works out better. If it does, drop the one you like the least and trade with the new set for a while.
Also, be very aware of the fact that with increased computerized trading, charting and retail trading becomes more difficult because indicators are manipulated by the computers. I like to use lesser known indicators because the ones touted by the popular charting sites are most likely the ones that will be manipulated.
Finally, as to your question about shorting - the main reason I believe it was occurring is the volume and the huge red candles on the daily and intraday charts. I think the only way the volume could have been generated on the way down was by "adding liquidity" which means shorting. This is a low float company with the vast majority of its shares either "closely held" by bigger investors or very tightly held in the hands of smaller ones.
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