Advance Decline Line

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The Advance Decline Line is one of the better known breadth indicators in technical analysis. Initially, the Advance Decline Line (AD Line) was applied to the NYSE (New York Stock Exchange). However, we are the first to provide this technical indicator for other indexes and exchanges, which lets the AD Line be used to analyze smaller stock market sectors.

As with all other breadth indicators, the AD line can be applied only to a basket of stocks and is based on the Advance/Decline Issues. However, we are the first to apply the Advance Decline Line formula to the volume of advances and declines, as well as the first to monitor the AD Line on intraday charts.

Advancing issues are stocks from the index basket that are traded above the previous trading day's close. If a stock is traded below the previous trading day's close, it is considered to be a declining stock. Furthermore, the volume associated with advancing stocks is considered to be advance volume and the volume of the declining stocks is classified as decline volume.

The Advance Decline Line is calculated as a running total of the advances minus the declines:

A/D Line = (Advancing Stocks - Declining Stocks) + Previous Period's A/D Line Value

Similarly, the Advance Decline Volume Line is calculated as the running total of the advance volume minus the decline volume:

A/D Volume Line = (Adv. Volume - Dec. Volume) + Previous Period's A/D Vol. Line Value

In technical analysis this indicator is used by many traders to confirm the strength of a current trend and the possibility of it reversing. It moves lower when there are more declining issues than advancing issues and moves up when there are more advancing issues. This concept allows you to spot changes in supply and demand. In order to get a more accurate picture of changing trends in supply/demand balance, technicians smooth the data by applying moving averages to the AD Line.

If, during the up-trend, the AD line starts to slope downwards, this could be a sign that the markets are losing their breadth - that a majority of the traders have begun to focus on declining stocks that may be getting ready to head in the other direction (up). Similarly, if during a down-trend, the AD Line begins to move upward, it could be an indication of a change in mood from bearish to bullish - that a majority of traders are switching from trading declining stocks to trading advancing stocks. If the slope of the A/D line is up and the market is trending upward, the market is said to be healthy.

If the Advance Decline Line moves with the trend (upward during the up markets and downward during the down markets), technical analysis states that the advance decline line confirms the current trend.

Below you see the S&P 500 advance decline line and the advance decline volume line.

Chart 1: S&P 500 index - Advance Decline Line.

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