Just because a stock provides a positive contribution to the indicator doesn’t mean that it’s in a healthy uptrend as one may believe based on the reading the breadth gauge is showing. In fact, some notable investors say the weekly A/D information is the first data point they look for to help gauge market sentiment. If you have to calculate the indicator, we recommend that you do it after the market has closed.
This means fewer stocks are declining and the decline in the index may be nearing an end. The AD Line measures the degree of participation in an advance or a decline. An AD Line that rises and records new highs along with the underlying index shows strong participation that is bullish. An AD Line that fails to keep pace with the underlying index and confirm new highs shows narrowing participation. Market strength is undermined when fewer stocks participate in an advance.
Applying the Advance-Decline Line in SharpCharts
The A/D line won’t always provide accurate readings in regards to NASDAQ stocks. This is because the NASDAQ frequently lists small speculative companies, many of which eventually fail or get delisted. While the stocks get delisted on the exchange, they remain in the prior calculated values of the A/D line. This then affects future calculations which are added to the cumulative prior value. Because of this, the A/D line will sometimes fall for extended periods of time, even while NASDAQ-related indexes are rising. It’s my belief that the use of multiple pieces of data is important in applying analysis to a market and specifically to the evaluation of trend participation.
Advance–decline numbers can be also used in your daily observations of the trades to determine whether a particular trend is a false or a spot. The A/D line may also provide conflicting signals sometimes, even though the trend within the stock index remains strong. Or the A/D line may strongly trend, but the stock index direction doesn’t follow suit as expected. However, you can use technical tools such as the A/D line to give you a general sense of the current market environment. Such negative divergence has occurred at major market turning points such as the end of the Roaring ‘20s bull market and during 1972 at the height of the Nifty Fifty market.
Technical Analysis 101: The Advance/Decline Line
The actual value of the AD Line depends on the starting point for the calculation. Since it has to start somewhere, the first calculation for the AD Line is simply Net Advances for one period. Subsequent values are calculated using the AD Line value for the previous period’s value plus Net Advances for the current period. The example above shows the AD Line calculation for 25 days beginning on April 15, 2010. The second value is lower because Net Advances for April 16th was negative (-1899).
- The NYSE Composite moved to new highs in July, but the AD Line peaked at the beginning of June.
- This means that the bigger the company the more impact they have on the index’s movement.
- To produce a chart of percent changes between symbols, check the Percent Change box.
- The first benefit is that it gives you an indication of the market conditions in the stock market.
The Advance-Decline Line (AD Line) is a breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks. Net Advances is positive when advances exceed declines and negative when declines exceed advances. The AD Line is a cumulative measure of Net Advances, rising when it is positive and falling when it is negative. Chartists can use Net Advances to plot the AD Line for the index and compare it to the performance of the actual index.
If at the end of the last trading day, 300 stocks were up (advance) and 200 were down (decline), 100 would be added to the advance/decline index value, pushing it to 1935. The goal is to look for divergences between an index and its underlying components. Typically, a healthy market will display broad participation when the majority of an index’s constituents are participating.
Simply put, the A/D Line is perhaps the best way to gauge the market’s overall health. It’s typically used for an entire index, like the NYSE, Dow Jones Industrial Average, S&P 500, and NASDAQ. In fact, in a period when the asset has been trending for a long time, the indicator is just a long line. On the other hand, the cons of the indicator are that it is mostly useful when you are trading indices. Also, unlike other indicators, it does not give a clear picture of what will happen in the future.