Advance/Decline Quotes

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The "advance/decline line" ("AD line") can be defined as follows:

• If the term is applied to issues (securities/stocks), the "Advance/Decline issues line" represents the difference between the number of advancing and declining issues. To calculate the advance/decline issues line, we simply subtract the number of stocks that belong to the declines group from the number of stocks that belong to the advances group;

• If the term is applied to volume, the "AD volume line" represents the difference between the volume of advancing issues and declining issues.

The AD line is considered one of the best indicators for the market's overall health. A large positive number indicates a strong market performance, while a negative result corresponds to a weak showing.

Advance-Decline Issues Line

In the following, we will discuss the advance/decline line concept applied to issues (securities). We call this the "AD issues line".

The advance/decline line is widely used to assess market breadth and as an indicator for market strength. When advancing issues outpace declining issues, the advance-decline line moves higher. Conversely, the AD line moves lower, when the number of declining issues outweighs the number of advancing issues. By studying the AD line, you can thus determine the overall health of the market.

The formula for calculating the advance-decline issues line is simple:

Advance/Decline Issues Line = Advancing Issues - Declining Issues

or if you want to measure is in percent:

AD Line = (Advancing Issues - Declining Issues) / Total Number of Issues * 100%

The advance/decline line is most frequently applied to stock indices. The total number of issues in the NASDAQ 100 is 100 stocks, while the DJI includes 30 stocks, and the S&P 500 has 500 stocks.

A positive AD line value means more stocks are currently advancing than declining. A negative value represents a situation where more stocks are declining than advancing. In chart 1 below, you can see an example of the S&P 500 AD line. Positive values are charted in green, negative values in red.

Chart 1. S&P 500 5-day intraday (one bar = 15 min)
Advance-Decline Line (Issues)

Advance-Decline Volume Line

In the following, we will discuss the advance/decline line concept applied to volume. We call this the "advance/decline volume line". Please refer to chart 2 below.

In the bottom pane of the chart, you will see a green shaded area, where the advances volume exceeds the declines volume. Where the declines volume surpasses the advances volume, you will see a red shaded area. We have added a volume moving average (VMA) that outlines these areas. The VMA turns red or green depending on whether we have a positive or a negative AD line. Various settings for the VMA could be applied, giving an analyst the ability to determine the "best fit "for each particular timeframe. The VMA is one of the advantages of the AD volume line, one that cannot be achieved with the advance/decline issues line.

The AD volume line has a horizontal scale from which you can read the advances and declines volume (in billions of shares).

Chart 2. S&P 500 5-day intraday (one bar = 15 min)
Advance-Decline Line (Volume)

Advance-Decline Momentum Volume Line

Please refer to chart 3 below. In the bottom pane of the chart, you will notice a green VMA line, where the advances momentum volume exceeds the declines momentum volume, as well as a red VMA line, where the declines momentum volume surpasses the advances momentum volume. The advance/decline momentum volume line has a horizontal scale from which you can read the advances momentum volume and the declines momentum volume (in millions of shares).

Chart 3. S&P 500 5-day intraday (one bar = 15 min)
Advance-Decline Line (Momentum Volume)

We have already explained the key difference between AD (cumulative) volume and AD momentum volume in the "Advance Decline Volume" section. If you compare charts 2 and 3 above, you will notice that the AD volume line on chart 2 encompasses the total volume that was traded since the beginning of the day. You can see that the AD volume line generally increases toward the end of the day, although there are a number of small dips that interrupt the upward pattern. These dips are caused when certain stocks move from the advances into the declines group (and sometimes back again). If a stock traded in the group of advancing issues and then later switched into the group of declining issues, all the volume for this stock (taken cumulatively from the beginning of the day) is "moved" into the volume of the declines group.

The advance/decline momentum volume line is not based on a cumulative volume total; it reflects the actual volume situation moment to moment (i.e., after the close of each bar). That is why the AD momentum line is more volatile and has more surges than the advance/decline volume line, which is flatter.

You probably do not know many traders who use the advance/decline line for intraday trading. Maybe this is because they do not yet know about AD momentum volume? If you look at the 1-day intraday chart (one bar = 1 min) you will come to the conclusion that trading based on an intraday chart using the advances and declines concept is possible; in fact, the applications we discussed earlier are valuable tools for various intraday trading applications.

Chart 4. S&P 500 1-day (1 bar = 1 min)
Advance-Decline Line (Momentum volume)

In chart 4 above (a one-day chart with 1-minute bars), you can clearly see three big surges in the advance/decline momentum volume line. The first occurred at around 12:30 and the last at around 15:15. These surges in the AD momentum volume line coincide with short-term index reversal points - a nice intraday indicator for 2 short sales..

In concluding, we would like to summarize the main difference between the various AD lines, as discussed above:

• The Advance/Decline issues line shows the actual number of stocks that are currently trading in the group of advancing or declining issues;
• The AD volume line show where the main trading activity is presently concentrated (i.e., in the advances or in the declines group;
• You can apply the concept of volume moving averages (VMA) to the AD volume line;
• At any given point during a trading day, the AD cumulative volume line encompasses the total volume that has been traded since the opening bell;
• The AD momentum volume line shows the actual difference between advancing and declining volume, as they occur during the day. This is an excellent tool for intraday trading.

  Next: Advance/Decline Ratio

A. v. S.
V. K.

Copyright 2004 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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