I (George Bodo) have been constructing some paraphernalia — but within the technical analysis realm.

One of them which I’ve been trying to dry run is the advance-decline line.

It’s a simple tool for measuring market breadth and internal strength.

You always want to know whether a stock market rally is strong or just a short-lived passing cloud and vice versa.

It can be defined as the cumulative sum of:

advancers (stocks closing a trading day on a positive note)

minus

decliners. (stocks closing the trading day on negative note).

On days when the number of advancers exceeds the number of decliners, the advance-decline line will rise.

And on days when decliners exceed advancers, the line will fall.

However, the importance of this indicator lies in spotting a divergence.

Ordinarily, the breadth line should replicate a stock market index to the extent that when an index is rising, the line also rises — and vice versa.

However, in a case where an index is rising while the line is falling, that’s called a negative divergence; and the rally is probably being fuelled by just a few big stocks.

When a stock index is touching new highs while the AD line is falling, that signals weak market internals and the rally is nearing an end.

I recently constructed an AD line for the NSE and put this hypothesis to test, with an interesting result.

Based on my readings, the market topped in February 2015.

But before that, it was preceded by two negative divergences, albeit minor. Since then, the market has been on a downdraft with both the NSE 20-share and All-Share indices losing 45 per cent and 30 per cent respectively, peak-to-trough.

Effectively, it means that if you had spotted those two negative divergences, you needed to have exited or at least reduced your exposures.