What is it?
Shows how many stocks are participating in a stock market movement.
This tool is classified as a breadth indicator; these indicators generally show the amount of participation in an advance or decline movement of a stock market. It can be used to answer the question ‘how broad is the rally or sell-off?’.
The Advance-Decline Line (AD Line) is one of the most widely used breadth indicators. It is based on Net Advances, which is the number of advancing stocks less the number of declining stocks.
How is it calculated?
Advance-Decline (AD) = number of advancing stocks – number of declining stocks
Each value of the AD Line is calculated by taking the difference between the number of advancing to declining issues and adding the result to the previous period’s advancing to declining value:
Advance-Decline Line (AD Line) = previous AD value + current AD value
In the table below note the first AD Line value is the same as the advance decline value. The AD Line has to start somewhere so the first value is simply the advance-decline. The next calculation is the advance-decline value for the previous period’s value plus the advance-decline for the current period.
How do you read it?
The AD Line rises when advances exceed declines and falls when declines exceed advances.
Can be used to confirm a rise or fall in a stock index
The AD Line can be used to compare and confirm an advance or a decline in the stock index.
In the chart below I added the AD Line (in blue) with the NYSE index (in grey) for comparison. Below the line chart I also added the advance-decline in bar chart format (the advances to declines are clearly visible).
This type of analysis can tell us a few things about a particular movement in a stock market.
An AD Line that rises and records new highs along with the stock index shows strong participation by the majority of stock – that is a positive bullish sign and shows the market is strong.
An AD Line that fails to keep up with the stock index is a caution sign – it shows fewer and fewer stocks are participating in the advance. Market strength is undermined when fewer stocks participate in an advance.
The market is considered weak when the AD Line moves to new lows along with the underlying index. This reflects broad participation in the decline.
Narrowing participation is often identified with a bearish divergence between the AD Line and the underlying index.
A bullish divergence forms when the AD Line fails to record a lower low along with the index. This means fewer stocks are declining. This signals the advance in the index may be nearing an end a potential price reversal could be forming.
A bearish divergence forms when the AD Line fails to record a higher high along with the index. This means fewer stocks are advancing. This signals the decline in the index may be nearing an end a potential price reversal could be forming.