Advance Decline Line
The Advance Decline Line (A/D) is a technical indicator used in analyzing the breadth of market moves. Because indexes such as the S&P 500 and DJIA show movement based on a relatively small group of very large capitalization stocks it can sometimes paint a false picture of what is happening in the broader market. The advance decline line helps to show when market moves are limited to a small spectrum of stocks and when they are part of a broader overall rise or decline in the market.
The advance decline line is plotted as a cumulative sum of the daily difference between the number of advancing stocks and the number of declining stocks in a particular stock market index. So, when there are more stocks making gains the advance decline line rise and when there are more stocks declining the advance decline line also declines. As a measure of broad market sentiment, the A/D line is the most popular internal indicator used by technical investors.
Perhaps the best use of the A/D is in showing divergences in the market, that is when the stock market index moves in one direction, but the A/D line moves in the opposite direction. There have been several occasions where the A/D line showed a divergence in the market and predicted a broad sell off. These examples include the late 1920s at the end of the roaring twenties market and the beginning of the Great Depression, during 1972 at the height of the Nifty Fifty market, during the US Dot-com bubble in 1999–2000 and most recently in March 2008 before the late-2008 market collapse.
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