Advance-Decline
Line
The popular Advance-Decline
(AD) Line is a market breadth indicator, providing
a very good measure of overall market strength
Overview
The
Advance-Decline line measures the broad market strength
represented by the New York Stock Exchange (NYSE).
Historically, the AD Line peaks out well ahead of
the more widely followed market indices and averages.
It provides such useful information as:
- Overall market strength
- Rising or falling
trends
- Whether the trend
is intact, and
- The length of the
current trend
The AD Line
is calculated by taking the difference between the
advancing and declining issues each day (usually
on the NYSE). This positive or negative number is
added to the cumulative AD line.
- When the AD line
is positive, more stocks are advancing than
declining and the A/D Line moves up
- When the AD line
is negative, more stocks are declining than
advancing and the A/D Line moves down
Interpretation
The AD
Line is a good indicator of overall market strength;
and many feel it is more revealing than popular
indices such as the Dow Jones or the NASDAQ Composite
Index. This is because the AD line is usually calculated
on the NYSE, which represents the largest equities
marketplace in the world with over 3,025 listed
companies (see the Sidebar below).
In using
the AD Line, keep an eye on the Trend and watch
for Divergence from other indices or sectors:
Trend:
By studying the trend of the AD Line you can see
if the market is in a rising or falling trend, if
the trend is still intact, and how long the current
trend has prevailed.
Divergence:
The AD line should trend in the same direction with
the market averages. When the AD line peaks out
ahead of the market, as it often does, investors
are alerted to poor market breadth.
Typically,
the daily AD Line is used to watch for short to
intermediate trends. A weekly AD Line is considered
more useful for trend comparisons that span several
years.
Overbought/Oversold
Indicator
The Overbought/Oversold
Indicator (OB/OS) is simply a smoothed AD Line.
The smoothing is done by taking the 10-day exponential
moving average of the A/D Line. Smoothing the A/D
Line makes it fluctuate within a narrower range
with heavier weighting given to past data.
The OB/OS
indicator generally fluctuates in a range of +400
to -400. A level above +200 suggests an overbought
market while a level below -200 suggests an oversold
market.
Further
Information
There are
a number of other useful indicators for measuring
market breadth. See also the McClellan Oscillator,
McClellan Summation Index, Upside-Downside Volume,
and the Arms Index.
Sidebar
on the NYSE
The
New York Stock Exchange (NYSE) is the largest equities
marketplace in the world and is home to 3,025 companies
worth more than $16 trillion in global market capitalization.
As of year-end 1999, the NYSE had 280.9 billion
shares listed and available for trading worth approximately
$12.3 trillion.
Over
two-thirds of the roster of NYSE companies have
listed here within the last 12 years. These companies
include a cross-section of leading U.S. companies,
midsize and small capitalization companies. Non-U.S.
issuers play an increasingly important role on the
NYSE. As of July 1999, 382 non-U.S. companies were
listed here - more than triple the number 5 years
ago.
-- From
the NYSE website at NYSE.com
