12 May

Hidden Market Indicators – Advance/Decline Line

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There are seemingly an endless number of indicators that you can use for analyzing the markets.

From momentum indicators to oscillators it doesn’t matter what you need – there is something for you to use.

But there is one indicator that’s a hidden indicator.

Yes, this is an indicator that you will not find in your standard trading books,

It’s actually an indicator that the pro’s don’t want you to know about because it gives away their edge.

Ready to learn about this hidden edge?

 

The Advance/Decline Line “A/D Line”

 

The Advance/Decline (A/D) line is a technical indicator that plots the difference between the number of advancing and declining stocks.  

It’s important to keep in mind that the indicator is cumulative, where a positive number is added to the previous value, and a negative number is subtracted from the prior value.

The A/D line is a key market sentiment indicator that tells the traders whether there are more stocks rising and falling at that point of the trading day.

A primary use for the A/D line is to confirm price trends in major indexes and has the potential to alert you to reversals when divergences occur.

 

Key Points:

 

  • The A/D line is a breadth indicator that is used to show how many stocks are trading higher or lower.
  • If the SPY is rallying, a rising A/D line confirms the uptrend showing strong participation.
  • If the SPY is rallying and the A/D line is falling, it is indicating fewer stocks are rallying.  This means the index (SPY) could be near the end of its rally.
  • If the SPY is declining, a falling A/D line confirms the downtrend
  • If the SPY is declining and the A/D line is rising, it is indicating few stocks are making new lows and the index may be near the end of its decline.

 

The Formula

 

The formula for the A/D line is not too complicated.

A/D = Net Advances + Previous Advances

Where…

Net Advances = Daily ascending – declining stock

Previous Advances = Prior indicator reading

 

How To Calculate the Advance/Decline (A/D)

 

In order to calculate the A/D, make sure to follow these steps.

  • Subtract the number of stocks that finished lower on the day from the number of stocks that finished higher.  This is the Net Advances
  • The next day, calculate the Net Advances for that day.  Add to total from prior day if positive or subtract if negative.  

What Does The A/D Line Tell You

 

The A/D line is used to confirm the strength of the current trend and the possibility of reversal.  

This indicator shows if the majority of the stock is participating in the direction of the market.

If the indexes are moving up but the A/D line is sloping downwards, called bearish divergence, it’s a sign that the markets are losing their breadth and may be about to reverse direction. 

If the slope of the A/D line is up and the market is trending upward, then the market is said to be healthy.

If the indexes are continuing to move lower and the A/D line has turned upwards, called bullish divergence, it may be an indication that the sellers are losing their conviction. 

If the A/D line and the markets are both trending lower together, there is a greater chance that declining prices will continue.

 

Conclusion

 

So if you are looking to get an edge in the market while determining if the stocks are supporting the trend, the Advance/Decline Line is the indicator of choice.

This indicator gives you the insight to determine if there is divergence between the underlying stock and the index, potentially signaling a reversal in the markets.

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