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Patent #: US 7,831,984 B2
MarketVolume®'s technology of displaying and presenting intraday volume and volume based technical indicators is protected by copyright law and patent. Unauthorized distribution or reproduction of proprietary technologies will be prosecuted to the maximum extent possible under the law.

Important: Advance-Decline Volume Ratio (AD Volume Ratio) as well as other indicators based on the Advance-Decline Data (AD Data) could be applied to a group of stocks (market indexes, stock exchanges, portfolios, and etc) only. By their nature, Advance-Decline indicators (AD indicators) cannot be used on a single security (stock, ETF, and etc).

Description

We are the only source of advance decline indicators for U.S. indexes and exchanges on daily and intraday level which allows to use it in the indexes technical analysis.

The Advance-Decline Volume Ratio is a Breadth indicator that is used in technical analysis to evaluate Market Breadth, spot overbought and oversold periods and generate trading signals. It is quite similar in its calculation and analysis to Advance-Decline Issues Ratio (AD Ratio) with the only difference that instead of advancing and declining stocks it uses Advance and Decline volumes.

Technical Analysis, Signals and Trading Systems

In the bottom pane of Chart 2 below, you can see a graphic representation of the Advance Decline Volume Ratio (top of three indicators). You will see a green line when the volume of advancing issues exceeds the volume of declining issues (i.e., an AD volume ratio > 1). The line turns red, when the volume of declining issues surpasses the volume of advancing issues (i.e., an AD volume ratio between 0 and 1).

On the same S&P 500 chart below you may see that Advance-Decline Volume Ratio moves along with AD Volume Oscillator and AD Volume PO (Percentage Oscillator) and for visual analysis it does not really matter which one to use. However, when it come to the numbers, many traders may find that Advance-Decline Volume PO could be the best choice as it oscillates around 0 (zero) in the range from minus 100% to plus 100%. It das not have logarithmic scale and does not run into infinity as AD Volume Ratio does. At the same time, it does not work with volume numbers which could differ from time to time as it is in case with AD Volume Oscillator.

Chart 1. S&P 500 Advance/Decline Volume Ratio to compare to Oscillator and PO



In technical analysis Advance-Decline Volume Ratio used evaluate Market Breadth, define periods when market or index is in overbought or oversold area and generate trading signals to trade index derivatives. In many cases AD Volume Ratio is used in junction with AD Issues Ratio to confirm Market Breadth, overbought/oversold levels and to confirm generated signals.

Market Breadth

When evaluating Market Breadth a technical analysts looks whether Advance-Decline volume ratio moves above or below 1 (one) and on the general Market Breadth trend. There are several points to keep in mind:

• Advance-Decline Volume Ratio readings above 1 (one) reveal that advancing stocks are traded more actively - traders and investors are more interested in them which is bullish sentiment and a sign of positive Market Breadth;
• Advance-Decline Volume Ratio readings below 1 (one) and above 0 (zero) reveal that declining stocks are traded more actively - traders and investors are more interested in the stocks in decline which is a reflection of the bearish sentiment and a sign of the negative Market Breadth;
• When Advance-Decline Volume Ratio moves up it reveals that traders and investors are switching from the declining stocks trading to the trading of the advancing stocks. If AD Volume Ratio readings during this advance are below 1 (one) it is a sign of weakening of the bearish sentiment (market Breadth), and if AD Volume Ratio readings are above 1 (one) during this advance it is a sign of strengthening of the bullish sentiment (Market Breadth);
• When Advance-Decline Volume Ratio readings decline it reveals that traders and investors are switching from the advancing stocks trading to the trading of the declining stocks. If AD Volume Ratio readings during  this decline are above 1 (one) it is a sign of weakening of the bullish sentiment, and if AD Volume Ratio readings are below 1 (one) during this decline it is a sign of strengthening of the bearish sentiment (Market Breadth).

NYSE Composite and S&P 500 indexes are the most common indexes that are used to evaluate overall Market Breadth of the U.S. Stock Market and U.S. economy. Other indexes are usually used to evaluate sentiment in the various industry sectors.

The described above points could be useful when AD technical analysis is used to generate trading signals to trade index derivatives as well.

Overbought/Oversold Condition

Before diving into overbought/oversold technical analysis analysis, it is worth mentioning that if an index, market or any tradable security is considered as overbought/oversold it does not imply that you will see a trend reversal. Oversold/overbought condition is an indication that the index, market or any security you analyze is in the condition when it is highly predisposed to change its trend.

It is usually recommended to check both AD Volume and AD Issues Ratios when looking for overbought/oversold level. As a rule, Advance-Decline Volume Ratio readings below 0.15 are considered as oversold and readings below 0.10 are considered extremely oversold. You should be careful when it comes to the overbought levels, as depending on the index they may greatly differ. As an example, AD volume Ratio readings above 10 could be considered as strongly overbought for the DJI (30 stocks), yet, for the S&P 500 these readings should be above 40 to be considered as strongly overbought. This is one of the things to consider using Advance-Decline Volume PO instead of the Ratio.

Signals and Trading Systems

Advance-decline technical analysis applied to the indexes could be used to trade index derivatives. As an example, QQQ stock tracks the Nasdaq 100 index (not the other way around), therefore, the Nasdaq 100 signals could be used to trade QQQ. In the same way S&P 500 analysis could be used to trade SPY stock and ES emini index futures, DJI analysis could be used to trade DIA stock, Russell 2000 analysis could be used to trade IWM stock, and etc.

When it comes to generating signals based on the Advance-Decline Volume Ratio, simple trading system would tell to sell when AD Volume Ratio drops below 1 (one) and to buy when AD Volume Ratio raises above 1. At the same time a trader may look for positive and negative divergence when price makes new high/lows, yet, AD Volume Ratio fails to make new high/lows.

Chart 2. DJI Advance/Decline Volume Ratio and signals with negative divergence

Formula and Calculations

The AD volume ratio is the line where at each point of time (horizontal scale) you can see the result of dividing of the advancing by declining volume (vertical scale). The formula for calculating the A/D issues ratio is simple:

AD Volume Ratio = SMA(Advance Volume/ Decline Volume)

Where SMA is Simple Moving Average applied to Advance-Decline Volume ratio to smooth it. Some references may apply moving averages directly to the advance volume and decline volume and then calculate ratio. yet, it will not make a lot of difference in numbers and picture. In this formula will look more complex:

AD Volume Ratio = SMA(Advance Volume) / SMA(Decline Volume)