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Advance/Decline Line (A/D Line)
The Advance/Decline Line (A/D Line) is very often used as a gauge of the market breadth. It is a joint sum of the Advancing-Declining Issues indicator. The Advance/Decline Line (A/D Line) is an extremely efficient measure of the strength of the market.
How does one calculate the A/D Line correctly? It is a running total of advancing stocks minus decreasing stocks. A/D Line has been created for gauging the market's strength. It says that as long as there are more advancing issues than decreasing issues, the market is in strong position. As well as the stock index is a compound of stock prices the A/D Line is a compound of stock fluctuations. That is why A/D Line is declining every day much quicker compared to the weekly trend and the indices based on prices. There is a tendency of having the same number of so-called "up days" and "down days." In addition, the foregoing trend is a result of the average stock. However, the profit finally starts to increase more quickly than the losses.
There is an opinion that the A/D Line depicts the strength of the market more efficiently than the more often used Dow Jones Industrial Average (DJIA) or the S&P 500 Index. If one examines thoroughly how the A/D Line is changing he is aware if the market is in a rising or falling trend, if the trend is still stable, or how long the ongoing trend has been on the market. Sometimes the A/D Line also works as a gauge of general strength of the market. The A/D Line goes up if advancing stocks outnumber declining ones. The A/D Line moves down if there are more declining stocks than advancing ones. Sometimes the A/D Line is also used for highlighting a show between itself the DJIA or the same index.
In many cases, it is possible to forecast the bull market's end when the A/D Line starts to round over even when the DJIA is trying to reach new peaks. Usually when a discrepancy between the DJIA and the A/D Line is growing, it means that the DJIA has changed its direction and moved towards the A/D Line.