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Technical Indicators: A (part 2)
Advance/Decline Line
The Advance/Decline Line (A/D Line) is one the most widely used measures of market breadth. As a cumulative total of the Advancing-Declining Issues indicator, the A/D Line has proven to be a very effective gauge of the market's strength.
The A/D Line is calculated from the running total of advancing stocks minus declining stocks. Designed to measure the strength of the market, a sector or industry, it makes the basic underlying assumption that as long as there are more advancing issues than declining issues, the market remains strong. While a stock index is a composite of stock prices, the A/D Line is a composite of stock movement. This gives the daily A/D Line a downward bias relative to the weekly A/D Line and the price-based indices. This downward bias is a result of the average stock tending to have as many up days as down days, but ultimately the gains will tend to accumulate faster than the losses.
 
The A/D Line can function as a measure of overall market strength. When more stocks are advancing than declining, the A/D Line moves up. When declining stocks outnumber advancing stocks the A/D Line will move down.
Many feel that the A/D Line shows market strength better than the more commonly reported Dow Jones Industrial Average (DJIA) or the S&P 500 Index. Studying the trend of the A/D Line can illustrate if the market is in a rising or falling trend, if the trend is still intact, or how long a current trend has prevailed.
The A/D Line can also be used to spotlight a divergence between itself the DJIA or a similar index. Often, an end to a bull market can be predicted when the A/D Line begins to round over even while the DJIA is trying to make new highs. Historically, when a divergence develops between the DJIA and the A/D Line, it is the DJIA that has changed direction and moved in the direction of the A/D Line.
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Advance/Decline Ratio
The Advance/Decline Ratio (A/D Ratio) illustrates the ratio of advancing issues to declining issues. This is used to display market breadth and while similar to the Advancing-Declining Issues, the A/D Ratio remains constant regardless of the number of issues that are traded on the New York Stock Exchange (which has steadily increased).
This indicator's value is demonstrated by its ability as an overbought/oversold indicator. When the indicator moves towards its upper limits this is inidcative of a overbought situation and implies a correction may occur soon. When the indicator is towards its lower limits this is indicative of an oversold situation and suggests a technical rally is due. Day-to-day fluctuations of the Advance/Decline Ratio are often eliminated by smoothing the ratio with a moving average.
Advancing-Declining Issues
Advancing-Declining Issues is a market momentum indicator used to show the difference between advancing issues and declining issues on the Exchanges (NYSE, NASDAQ...). This information is used to determine the strength of the market on a daily basis.
The formula for the Advancing-Declining Issues is simple:
Advancing Issues - Declining Issues
This calculation is is the basis of many market breadth indicators, including the Advance/Decline Line, Advance/Decline Ratio, Absolute Breadth Index, Breadth Thrust, McClellan Oscillator and Summation Index. Indicators that use advancing and declining issues in their calculations are called market breadth indicators. Plotted by itself, this indicator is helpful to determine daily market strength. Strong up days can have readings of more than +1,000. Very weak days can have readings of under -1,000.
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