"Life's so unpredictable. You never know when the next high or low will strike you. The trick is just to flow with the tide."
-- Zeenat Aman
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The Advance/Decline Index is often referred to as the Advance/Decline line. Traders use it to help confirm the current stock index trend, or can forewarn of stock index reversals when the A/D index diverges with the stock index direction. This indicator can be calculated in any time frame but is generally referenced from daily statistics. You will find in my weekly market recaps that I look at it on a weekly basis as it provides a better picture of what’s happening generally.
A look at the NY Composite Index with the Advance/Decline Line below.
What Does the Advance/Decline Line Tell You?
Rising advance/decline index values are often used to confirm the likelihood that an upward trend in a given stock index will continue. If the related stock index is rising, but there are more declining issues than advancing issues—i.e., the A/D index is falling—this is called a bearish divergence and it's usually a sign that the stock index is losing its breadth and may be getting ready to reverse to the downside.Similarly, when the A/D index is rising while the related stock index itself is falling, this is called bullish divergence and could be a sign that the stock index will start to head higher soon.
Important - While the A/D Line provides a hint about the future direction of an index, most traders use the advance/decline index in conjunction with other technical indicators and/or chart patterns to generate a specific trading signal with more precision. The A/D index doesn't provide buy or sell signals on its own. Rather, as what’s called an “internal” indicator, it gives a broad perspective on the health of the stock index.
Imagine that the advance/decline line for the S&P 500 closed last week at 1908. If at the end of this week, the net difference between the advancing issues and the declining issues was -4,092, that net would be added to last week’s 1908 leading to a new index value of -2184... and suggesting that the bears hold sway with respect to the index for the time being.
