The Real Advance Decline Line by Frank Barbera Jr., C.M.T.
Each day, stock market analysts calculate the number of stocks closing up versus the number of stocks closing down, resulting in the advance-decline line. This simple arithmetic exercise can help confirm the underlying trend or point to deteriorating market conditions. However, changes in the market have altered the perceptions of one analyst in particular on how to calculate the A-D line. Here's how former Financial News Network market analyst Frank Barbera now looks at the daily A-D line.
For many years, the daily advance-decline (A-D) line has been among the most widely quoted of
market indicators . Many market analysts believe the daily A-D line provides one of the most accurate
reflections of the market's near-term technical health. In its most common form, the indicator is
constructed by taking the net difference of advances over declines for each day and then plotting a
running total of these differences. The resulting cumulative flow line can be used as a yardstick by
comparing it with the behavior of the market averages in order to determine whether the majority of
stocks is fully participating in a given advance or decline.
Generally speaking, new highs in the market averages that are confirmed by new highs in the A-D line
suggest a technically healthy market, while markets advancing to new highs without A-D line
confirmation are considered to be more vulnerable to a significant decline. This form of divergence analysis can help discern market turning points, particularly market tops.