Technical Analysis, Studies, Indicators:
Advance Decline Percentage Oscillator
Important: Advance Decline Percentage Oscillator is based on the A/D data and could be applied to indexes, exchanges, portfolios or any basket of stocks - due to its nature t cannot be applied to a single stock or a single ETF.
Description
There are a number of indicators (Breadth Indicators) in technical analysis that are based on advance-decline data. The Advance/Decline (A/D) Ratio is one of the most popular and analyzed Breadth indicators that is used to evaluate Market Breadth, define periods when the market or an index could be considered overbought or oversold, track money flow (when applied to AD volume) between groups of advancing and declining stocks and generate trading signals to trade Exchange Traded Funds (ETFs) and other instruments that track performance of indexes. The Advance/Decline PO (Percentage Oscillator) is an advanced version of the A/D Ratio. The A/D PO (the same as the A/D Ratio) permits you to measure and analyze advancing stocks in relation to declining stocks.
The formula for calculating the A/D issues ratio is:
A/D Ratio = Advances / Declines
The negative aspect of this formula is that the Advance Decline Ratio has a logarithmic scaling from zero (when advances = 0) to infinity (when declines = 0) with the center line at 1 (when advances = declines). This should not be a problem when a trader analyzes advancing and declining stocks of the NYSE. However, in the case of a small basket of stocks, such as DJI (Dow Jones Industrials), we often encounter a situation where the A/D Ratio reaches zero or infinity (either the declines or advances are equal to zero).
To avoid a situation in which the Advance Decline Ratio tends towards infinity, our team has developed and implemented a new technical indicator, the Advance/Decline Percentage Oscillator (A/D PO), in September, 2008. We are the first to introduce this indicator to the world and at present are the only ones to provide this indicator. As a result, we consider ourselves to be this indicator's developers.
The A/D PO has the same meaning as the A/D Ratio and analyzes the ratio of advances to declines. The difference between the A/D PO chart and the A/D Ratio chart (with similar chart settings) is barely noticeable. Yet, it allows you to analyze the A/D Ratio results in a percentage scale of -100% to +100%.
Technical Analysis, Signals and Trading Systems
Below are the chart of the Advance-Decline Ratio and the Advance-Decline PO.
Chart 1: DJI index - A/D Issues Ratio and A/D issues PO
As you see, the Advance/Decline Percentage Oscillator looks exactly the same as the Advance/Decline Ratio with only a difference in scaling. The same technical analysis that is applied to the A/D Ratio can be applied to the A/D PO: as a confirmation indicator and to predict trend reversals.
On the chart #2 (see DJI chart below) you may compare Advance Decline Oscillator and Advance Decline PO.
Again, the same as in case when Advance Decline ratio was compared to AD PO (see DJI chart #1), the AD Oscillator and AD PO are identical with a difference in scaling only.
Chart 2: DJI index - A/D Oscillator and A/D PO
The same could be said about advance decline volume. When it comes to the comparison of AD Volume Ratio, AD Volume Oscillator and AD Volume PO, all these three technical indicators are identical (see the S&P 500 chart below) with a difference in calling only.
Chart 3. S&P 500 Advance/Decline Volume Ratio to compare to Oscillator and PO
As you may see, it does not really matter what to use when it comes to the visual analysis. However, when there is a necessity in using numbers, the most of traders and technical analysts would prefer the Advance Decline PO simply because it is measured in percent in the range from minus 100% and plus 100%. Some examples when the Advance Decline PO use is preferable would be when you need to:
- compare several technical indicators;
- compare different indexes;
- built mechanical trading system;
- set triggers and alerts;
- and et...
As was already mentioned above, Advance Decline Percentage oscillator is used in technical analysis to measure Market Breadth, define overbought and oversold periods, confirm current trend, track money flow and evaluate bullish bearish volume accumulation (when applied to AD volume), and generate trading signals for ETFs and other index tracking instruments.
Market Breadth
When analyzing Market Breadth an analyst is looking at the balance of the advancing and declining issues as well as at the balance of the advance decline volumes. As a rule, the S&P 500 index is used to evaluate the overall Market Breadth, yet other indexes could be used to evaluate breadth of various market sectors. When analyzing Market Breadth you should understand that:
- Advance Decline PO readings above 0 (zero) suggest that the number of advancing stocks is bigger that the number of declining stocks;
- Advance Decline PO readings below 0 (zero) reveal that the number of declining stocks is bigger that the number of advancing stocks;
- Advance Decline Volume PO readings above 0 (zero) indicate that the advancing stocks are traded more actively (on higher volume) than the declining stocks;
- Advance Decline Volume PO readings below 0 (zero) indicate that the declining stocks are traded more actively (on higher volume) than the advancing stocks.
In the table below you may see main possible AD PO readings and Market Breadth Sentiment.
Table 1: Advance Decline PO readings and Market Breadth
| AD Issues PO | AD Volume PO | Market Breadth |
| above 0 (positive) | above 0 (positive) | Bullish - Strong |
| above 0 (positive) | below 0 (negative) | Bullish - Weak |
| below 0 (negative) | below 0 (negative) | Bearish - Strong |
| below 0 (negative) | above 0 (positive) | Bearish - Weak |
Trend Confirmation and Reversals
If the Advance Decline PO moves in tandem with the price MA (Moving Average), the technical analysis will confirm the trend.
If the A/D PO movement and the price trend diverge, you can anticipate a possible change in the market trend. The "Buy" signal may be generated when the A/D PO starts to advance after a decline and a "Sell" signal may be triggered when the A/D Po starts to decline after advancing. The same principles of the SBV (Selling Buying Volume) simple trading system can be applied to the Advance Decline Percentage Oscillator.
Divergence of Percentage Oscillator is another aspect technical analysts are looking into. Such, positive divergence - when price makes new lows, yet Advance Decline PO fails to make new lows - would suggest weakening of a bearish trend and the possibility of reversal up in the near future. Controversially, negative divergence - when price makes new highs, yet Advance Decline PO fails to make new high - is usually a sign of weakening of a bullish trend and the possibility of reversal down in the near future.
Overbought Oversold Periods
When analyzing for overbought and oversold signals you have to understand that overbought/oversold signals are not buy/sell signals. Overbought/oversold signals are rather indicate overbought/oversold condition when the market, index, stock or any other tradable security is predisposed to change its trend. The market (index or stock) could remain in overbought condition and to continue running up. Controversially, it may stay in oversold condition and to continue sliding down. When you have overbought/oversold signals, technical analysis recommends waiting for trend-reversal conformational signals. Technical analysis also suggests that you should expect stronger trend reversal when prior to your trend-reversal signals you recorded overbought/oversold signals.
Overbought periods are spotted when Advance Decline PO with 20-bar period setting runs above plus 20% on the daily charts (1 bar = 1 day). Controversially, oversold signals are generated when Advance Decline PO with 20-bar period setting runs below minus 20% on the daily charts (1 bar = 1 day). For Advance Decline PO with smaller bar period setting overbought levels are higher and oversold levels are lover respectfully. For Advance Decline PO with bigger bar period setting overbought oversold levels are closer to 0(zero) center line.
We do not show overbought/oversold numbers for intraday index charts, because due to mechanics in calculating advance decline data (based on the relation to the previous trading day close price), this analysis is more suitable on the daily charts (1 bar = 1 day).
Money Flow and Bullish/Bearish accumulation
It is quite important to understand traders (investors) actions in technical analysis. You should be able to interpret a technical indicator from a trader's action position and how it may affect supply demand balance. The same as traditional money flow indicators, advance decline indicators (Breadth indicators) show money flow. The difference is that Money Flow indicators are revealing whether traders are putting money into a stock or pulling them out, while advance decline indicators show whether traders are moving money from one group of stocks into another group of stocks with respect to the whole market (not to an individual stock):
- whether traders are pulling money out of declining stocks (weak/bearish stocks) and putting them into advancing stocks (bullish stocks) - more traders are buying,
- whether selling is increasing as more traders become focused on the group of the declining stocks - more traders prefer to close their positions and sell short.
When analyzing money flow technical analysis looks at indicator's trend and indicator's readings:
- Advance Decline volume PO readings are moving up - traders are moving from declining stocks and they are more focused on advancing stocks - bullish sign.
- Advance Decline volume PO readings are sliding down - traders are moving from trading advancing stocks to trading declining stocks - bearish sign.
- Advance Decline volume PO readings are positive - advancing stocks are more active - more traders are buying - bullish sign.
- Advance Decline volume PO readings are negative - more traders are selling - bearish sign.
When analysis bullish and bearish accumulation, technical analysis looks at how long Advance Decline Oscillator and PO were moving in positive and negative area respectfully. The longer Advance Decline oscillator stays in positive area the bigger bullish accumulation is and the dipper correction down could be expected. Controversially, the longer Advance Decline oscillator moves in negative area (below 0) the stronger bearish accumulation is and the stronger reversal up could be expected.
Trading Signals
As with other breadth indicators, the Advance Decline PO can be applied only to a basket of stocks. It can be used to analyze indexes (NASDAQ 100, S&P 500, DJI, NYSE and other). The index analysis can be used to trade index derivatives, such as QQQ, DIA and SPY. In addition, it can be used to trade stocks from the index basket that moves with their index.
A simple trading system based on the Advance Decline Oscillator would tell to sell when oscillator drops below 0 (zero line) after being about it and buy when Advance Decline Oscillator turns positive (moves above zero line).
On the DJI (Dow Jones Industrials) index chart below you may see an example of such signals:
Chart 4: Dow Jones Industrials (^DJI) index charts and Advance Decline Oscillator Signals
Formula and Calculations
Below are formulas used in A/D Percentage Oscillators. SMA (Simple Moving Average) is applied to smooth them and make suitable for technical analysis.
Advance/Decline Issues Percentage Oscillator:
A/D Issues PO = SMA[(Advance Issues - Decline Issues) / (Advance Issues + Decline Issues) x 100]
or
A/D Issues PO = SMA[(Advance Issues - Decline Issues) / Total Issues x 100]
Advance/Decline Volume Percentage Oscillator:
A/D Volume PO = SMA[(Advance Volume - Decline Volume) / (Advance Volume + Decline Volume) x 100]
Advance/Decline Momentum Volume Percentage Oscillator:
A/D Momentum Volume PO = SMA[(Advance Momentum Volume - Declined Momentum Volume) / (Advance Momentum Volume + Declined Mom Volume) x 100]
New Highs/Lows Percentage Oscillator:
H/L PO = (New Highs - New Lows) / (New Highs + New Lows) x 100
From the formulas above you see that
- if Declines = 0, A/D PO = 100%
- if Advances = 0, A/D PO = -100%
- if Advances = Declines, A/D PO = 0
- when advances are dominant, PO is positive and when declines are dominant PO is negative
By V. K. for MarketVolume.com
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