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Advance/Decline Analysis
Tutorial Analysis Examples AD Daily Report |
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Indicators based on the "advances" and "declines" concept - Advance-Decline (A-D) Line The "advance-decline line" ("A-D line") can be defined as follows:
The A-D line is considered one of the best indicators for the market’s overall health. A large positive number indicates a strong market performance, while a negative result corresponds to a weak showing. Advance-Decline Issues Line In the following, we will discuss the A-D line concept applied to issues (securities). We call this the "A-D issues line". The A-D line is widely used to assess market breadth and as an indicator for market strength. When advancing issues outpace declining issues, the advance-decline line moves higher. Conversely, the A-D line moves lower, when the number of declining issues outweighs the number of advancing issues. By studying the A-D line, you can thus determine the overall health of the market. The formula for calculating the advance-decline issues line is simple: A-D Issues Line = Advancing Issues - Declining Issues or if you want to measure is in percent:
The A-D line is most frequently applied to stock indices. The total number of issues in the NASDAQ 100 is 100 stocks, while the DJI includes 30 stocks, and the S&P 500 has 500 stocks. A positive A-D line value means more stocks are currently advancing than declining. A negative value represents a situation where more stocks are declining than advancing. In chart 1 below, you can see an example of the S&P 500 A-D line. Positive values are charted in green, negative values in red. Chart 1. S&P 500
5-day intraday (one bar = 15 min) Advance-Decline Volume Line In the following, we will discuss the A-D line concept applied to volume. We call this the "A-D volume line". Please refer to chart 2 below. In the bottom pane of the chart, you will see a green shaded area, where the advances volume exceeds the declines volume. Where the declines volume surpasses the advances volume, you will see a red shaded area. We have added a volume moving average (VMA) that outlines these areas. The VMA turns red or green depending on whether we have a positive or a negative A-D line. Various settings for the VMA could be applied, giving an analyst the ability to determine the "best fit "for each particular timeframe. The VMA is one of the advantages of the A-D volume line, one that cannot be achieved with the A-D issues line. The A-D volume line has a horizontal scale from which you can read the advances and declines volume (in billions of shares). Chart 2. S&P 500 5-day
intraday (one bar = 15 min) Advance-Decline Momentum Volume Line Please refer to chart 3 below. In the bottom pane of the chart, you will notice a green VMA line, where the advances momentum volume exceeds the declines momentum volume, as well as a red VMA line, where the declines momentum volume surpasses the advances momentum volume. The A-D momentum volume line has a horizontal scale from which you can read the advances momentum volume and the declines momentum volume (in millions of shares). Chart 3. S&P 500 5-day
intraday (one bar = 15 min) We have already explained the key difference between A-D (cumulative) volume and A-D momentum volume in the "Advance Decline Volume" section. If you compare charts 2 and 3 above, you will notice that the AD volume line on chart 2 encompasses the total volume that was traded since the beginning of the day. You can see that the AD volume line generally increases toward the end of the day, although there are a number of small dips that interrupt the upward pattern. These dips are caused when certain stocks move from the advances into the declines group (and sometimes back again). If a stock traded in the group of advancing issues and then later switched into the group of declining issues, all the volume for this stock (taken cumulatively from the beginning of the day) is "moved” into the volume of the declines group. The A-D momentum volume line is not based on a cumulative volume total; it reflects the actual volume situation moment to moment (i.e., after the close of each bar). That is why the A-D momentum line is more volatile and has more surges than the A-D volume line, which is flatter. You probably do not know many traders who use the A-D line for intraday trading. Maybe this is because they do not yet know about AD momentum volume? If you look at the 1-day intraday chart (one bar = 1 min) you will come to the conclusion that trading based on an intraday chart using the advances and declines concept is possible; in fact, the applications we discussed earlier are valuable tools for various intraday trading applications. Chart 4. S&P 500 1-day (1 bar = 1 min) In chart 4 above (a one-day chart with 1-minute bars), you can clearly see three big surges in the A-D momentum volume line. The first occurred at around 12:30 and the last at around 15:15. These surges in the A-D momentum volume line coincide with short-term index reversal points – a nice intraday indicator for 2 short sales.. In concluding, we would like to summarize the main difference between the various AD lines, as discussed above:
A. v. S. Copyright 2004 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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