Defining Advance/Decline Indicators by Fay H. Dworkin, Ph.D.
The notion is simple. When fewer and fewer issues participate in the upward trend of a primary bull market, "bad breadth" warns of a market turnaround. Although it is easy to track advancing and declining issues, it's not as easy to know what to do with the data afterward. I have encountered an astonishingly large number of ways to construct "advance/decline" (A/D) indicators. From one period to the next, the closing price of a traded vehicle can advance, decline or remain unchanged. These three outcomes are the
basic components of A/D indicators. Does the similarity end there? Which indicator does the best job?
By themselves, the numbers of advancing and declining issues have limited interpretive value. In a bull market, loss of momentum (today's value relative to some historical value) of advances may presage a downturn. In a bear market, loss of momentum of declines may mean the worst is over. This may explain why most A/D indicators are built on comparisons between advances and declines and can be included under two basic categories: difference indicators and ratio indicators. Within each category, however, they range from simple to complex.