The Advance/Decline Line ("A/D Line") is undoubtedly the most widely used measure of market
breadth. It is a cumulative total of the
Advancing-Declining Issues indicator. When compared to the
movement of a market index (e.g., Dow Jones Industrials, S&P 500, etc) the A/D Line has
proven to be an effective gauge of the stock market's strength.
Interpretation
The A/D Line is helpful when measuring overall market strength. When more stocks are
advancing than declining, the A/D Line moves up (and vice versa).
Many investors feel that the A/D Line shows market strength better than more commonly
used indices such as the Dow Jones Industrial Average ("DJIA") or the S&P 500 Index. By
studying the trend of the A/D Line you can see if the market is in a rising or falling
trend, if the trend is still intact, and how long the current trend has prevailed.
Another way to use the A/D Line is to look for a
divergence between the DJIA (or a similar
index) and the A/D Line. Often, an end to a bull market can be forecast when the A/D Line
begins to round over while the DJIA is still trying to make new highs. Historically, when
a divergence develops between the DJIA and the A/D Line, the DJIA has corrected and gone
the direction of the A/D Line.
A military analogy is often used when discussing the relationship between the A/D Line
and the DJIA. The analogy is that trouble looms when the generals lead (e.g., the DJIA is
making new highs) and the troops refuse to follow (e.g., the A/D Line fails to make new
highs).
Example
The following chart shows the DJIA and the
A/D Line.
The A/D Line is calculated by subtracting the number of stocks that declined in price for
the day from the number of stocks that advanced, and then adding this value to a cumulative
total.
Table 2 shows the calculation of the A/D line.
Because the A/D Line always starts at zero, the numeric value of the A/D Line is of
little importance. What is important is the slope and pattern of the A/D Line.
