Advance-decline divergence as an oscillator
by Arthur A. Merrill
Which indicators signaled the crash last October? One that had been shouting a warning was A-D
Divergence. This is one of our most venerable indicators. The Advance-Decline Divergence Oscillator
(ADDO) is a recent refinement.
A-D, advance minus decline, was first suggested by Col. Leonard Ayers of the Cleveland Trust Company
in 1926. He was searching for a way to locate buying and selling climaxes. The indicator is a simple
cumulation of the difference between the number of stocks advancing or declining in a day.
This indicator usually is coincident with the market, but tends to lag behind a buying or selling climax.
Analyst James Hughes suggested this might be caused by the fact A-D includes preferred and money-rate
stocks which don't catch the market climax.
The usual way to note divergence is the eyeball method: a curve of the index is visually compared to a
curve of the Dow Jones Industrial Average (DJIA). This is too subjective for my taste. The degree of
divergence depends on the skill of the observer. Another difficulty is that the curves are disparate. One is
in dollars, the other is a simple cumulation of numbers. The cumulation could start anywhere. Because of
these differences, a simple oscillator based on differences or on percentages is unsatisfactory.