Advance/Decline Quotes

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Per se, we cannot say that an indicator based on the Advancing Declining (AD) issues principle would be any better than one based on the concept of AD volume. Both have their advantages and disadvantages. In the following, we will take an in-depth look at these two indicators, and we will see how they can complement each other.

As a refresher, what does mean that a particular stock is presently in the group of advancing issues? It means this stock is currently trading above its previous close. Alternatively, you might say there are currently more buyers than sellers for this stock, and those who wish to buy are willing to pay higher prices. In other words, the bullish sentiment is presently stronger then the bearish sentiment. If you were to analyze the S&P 500 index at the end of a trading day, you found that 400 stocks were in the group of advancing issues and only 100 stocks in the group of declining issues, you could say that market sentiment during the day that had just elapsed was positive.

Volume is not only a measure of market breadth, it also indicates market strength. For instance, using the same example as above, assume that on a particular day, 400 stocks of the S&P 500 index closed up while 100 stocks closed down. Given this situation, you would presumably assume that the S&P 500 was strongly bullish that day. However, upon closer inspection of the volume data associated with the advancing and declining groups, you might discover that the advances volume was 600,000,000 shares, while the declines volume amounted to 400,000,000 shares. From this data, you could make the determination that the "bullish trend" was not as strong as you first believed.

Conversely, again using the previous example, assume that the advances volume was 800,000,000 shares and the declines volume amounted to only 200,000,000 shares. In this case, because the bulk of the volume activity was concentrated in stocks that belonged to the advances group, you could argue that this particular trend was much "healthier" than the first.

As you can see, Advance/Decline issues and Advance/Decline volume indicators supplement each other, making an analysis more accurate.

Let us apply our two indicators to the S&P 500 index over a 5-day period (see Chart 1 below).

Chart 1. Advancing and Declining (AD) Issues and AD Volume.
S&P 500 Index. 5-day Intraday (One Bar = 15 minutes)

Table 1. Advancing and Declining (AD) Issues and AD Volume. End-of-day data. S&P 500 Index. August 20, 2004 to August 26, 2004.

As you can see from Table 1 above:

• On August 20, 2004, 84% of the stocks in the S&P 500 index belonged to the group of advancing issues. Advances volume accounted for about 75% of the trading activity (i.e., 985/1316 *100). You could thus conclude that sentiment was strongly bullish;
• On August 23, 2004, 64% of the stocks in the S&P 500 index were in the declining issues group (i.e., only 33.8% were in the advancing group) despite that fact that volume was spread evenly between declining and advancing stocks (578 M in the advances group; 570M in the declines group). This that tells us that despite the S&P 500's decline by 0.24% that day, sentiment was more neutral than negative;
• On August 24, 2004, we had roughly 55% of stocks in the advancing issues group. About 56% of the trading volume was concentrated in the group of declining stocks (657/1172*100). Thus, we again had a sentiment reading that was more or less neutral;
• On August 25, 2004, 80% of stocks belonged to the advancing issues group - a strongly bullish sign. At first glance, it might seem that this day's activity was not as strongly bullish as it had been on August 20, where 85% of stocks belonged to the advancing issues group. However, by taking into consideration that close to 84% of the trading volume was concentrated in the advances volume group that day (i.e., 1122/1338*100), we can say that market breadth was actually healthier than it had been on August 20;
• On September 26, sentiment was once again neutral.

In summary, we can say that during these 5 days, market breadth was positive and the uptrend remained "healthy". Even on trading days, where the majority of stocks declined (e.g., on August 23, almost twice as many stocks were in decline - with only 33.8% of stocks belonging to the group of advancing issues), volume activity was still spread equally between declining and advancing stocks (578 M in the advances volume group and 570 M in the declines volume group).

As you can see, volume data helps you gain a more accurate view of market activity. If you are already applying the AD issues indicator to your analysis, it is certainly a good idea to add the AD volume indicator as well.

Volume will make your analysis more accurate and more reliable.

Next: Overbought/Oversold

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