ADVANCE/DECLINE LINE , PRICE INDICATORS
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.
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).
The following chart shows the DJIA and the A/D Line.
Date Advancing Declining A-D A/D Line
02/15/94 1198 882 316 316 316
02/16/94 1183 965 218 534 534
02/17/94 882 1251 -369 165 165
02/18/94 706 1411 -705 -540 -540
02/22/94 1139 1003 136 -404 -404
Because the A/D Line always starts at zero, the numeric value of the
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.