Advance Decline Line
In technical analysis, the advance-decline line is a trend indicator of the development of an overall market. The AD line is calculated as a time series of the cumulative daily differences between the number of stocks that have risen and the number of stocks that have fallen .
For each trading day, this market breadth indicator calculates the balance of stocks that have risen and fallen. This value is added to a (any start level). The next day you use the same procedure again. It is therefore possible and even highly probable that values greater than the actual number of index members will be achieved. A simple example:
Day 1: 500 stocks rise, 100 stocks fall Balance 400 AD line: 400
Day 2: 500 stocks rise, 100 stocks fall Balance 400 AD line: 800
Day 3: 500 stocks rise, 100 stocks fall Balance 400 AD line: 1200
and so on.
The high absolute number shows that the current upward trend has been going on for a long time. However, the analysis of possible negative divergences is more important than the absolute height of the A / D line.
The AD line is used as a supplement to the analysis of trends using trend lines . The weighting of the share in the market does not play a role in the calculation.
The AD line shows the quantitative development of a market or market segment, while a weighted stock index reflects the market development in terms of value. For example, stock indices can still rise if the majority of the stocks in the index are already falling. This is possible if some of the stocks, which are relatively highly weighted in the stock index, still rise and thus compensate for the price decline of the remaining stocks.
interpretation
In addition to the statement about the breadth of a market movement, a comparison of the parallelism of the course of the AD line and the market index allows conclusions to be drawn about a trend confirmation or a trend reversal. If both values develop in parallel, the AD line is to be interpreted as confirmation of the trend indicated by the index. If, on the other hand, the price development of the index and the development of the AD line differ, a trend reversal is to be expected.
By adding the previous day's value, the value of the AD line can be significantly higher than the number of stocks observed. In the example above 600 stocks are observed, so that one would prima facie assume that the AD line fluctuates between +600 and −600. In fact, however, the value is already 1200 on the third day of the example, i.e. more than 600 shares.
Adding the previous day's value smooths the AD line and therefore improves its informative value. Without such smoothing, the line would actually jump erratically between, for example, +600 and -600.
literature
- Alan J. Zakon, James C. Pennypacker: An Analysis of the Advance-Decline Line as a Stock Market Indicator . In: The Journal of Financial and Quantitative Analysis . Special Issue: Random Walk Hypothesis. tape 3 , no. 3 . University of Washington School of Business Administration, September 1968, pp. 299-314 , doi : 10.2307 / 2329815 .