Monday, April 18, 2011

The Advance Decline Line

According the Market Technicians Association - the Cumulative Daily Advance-Decline Line, perhaps the most widely known market breadth indicator, traditionally has been used to spot divergences relative to a general market price index, such as the S&P 500 or Dow Jones Industrial Average. Most commonly, the Cumulative A-D Line is calculated as a running total of daily net advancing minus declining stock issues on the New York Stock Exchange. Similar indicators may be calculated for other markets, such as NASDAQ, and weekly data also may be used. There are only two steps to compute this indicator.
1. From the number of advancing issues, subtract to number of declining issues each day, respecting sign. This is net advancing issues, and it is often a negative number.

2. Add that daily advance-declines difference to a cumulative total of the daily net advancing issues. This forms a continuous line that rises and falls with breadth trends on the NYSE.

The late great Ian Notley used a slightly improved formula which takes into account the number of unchanged issues or (advancing –declining)/unchanged. Either way the best way to read the A/D line is to spot divergences – such as the current divergence between the S&P500 and the NYSE A/D line. In order to correct the current negative divergence condition we need both the S&P500 and the A/D line to push back above their February – March peaks as noted on the chart. We should respect this indicator as it called the March 2009 bottom and the July 2010 bottom

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