V.12:3 (112-115): Advance-Decline Line Basics by Daniel E. Downing

Advance-Decline Line Basics by Daniel E. Downing

It never hurts to refresh your memory on the basics. Here's a primer on following the advance-decline line for the stock market.

A stock investor who has just begun to analyze the stock market using technical analysis will invariably look at the advance-decline line. There are solid reasons for doing so, for the advance-decline line is a useful indicator not only for the stock market, but also for numerous other markets. The advance-decline line analysis package is multidimensional in that aspect. The daily advance-decline line is the most commonly used. To demonstrate, we'll use daily data from the New York Stock Exchange (NYSE), but daily data from the NASDAQ Composite or the American Stock Exchange (ASE) could be used just as easily.

The advance-decline line analysis package consists of four moving averages, an oscillator, a momentum indicator and a simple line chart. By constructing these tools and understanding how they interact, you will have a tremendous tool for obtaining information from the daily advance-decline statistics.

BREADTH FOR KNOWLEDGE

A technician looks at breadth statistics because breadth is a good measure of demand or the lack of thereof. For example, many stocks rising indicates that there is widespread demand for equities. Widespread demand, in turn, means potentially large money flows into equities. Likewise, if few stocks are advancing, then the balance favors money flowing out of the equity markets. So advance-decline data can be an indication of supply and demand factors. Price action gives you one dimension of market activity, which might be pictured as a vertical line. Breadth gives you another dimension of that image, which you might picture as a horizontal line. By using the two in tandem, you have a two-dimensional image that will impart more information about the internal technical state of the market.