Education / Indicators / Advance/Decline line

The Advance/Decline has been one of the most popular tools in measuring the breadth of the broad market. Plotting this indicator on an intermediate term or long term basis is a great way to gauge the strength of the broad market. Traders believe that cap-weighted indices such as the NASDAQ Composite or the S&P 500 cannot have a sustained advance if they rise without the A/D line confirming (commonly called a "divergence"). There have been various times in history when the A/D line has acted as a precursor of a significant stock market top.

The A/D Line is calculated by subtracting the number of stocks that declined in price for the day from the number of stocks that advanced, and then adding this value to a cumulative total.

The concept of the Advance/Decline line is to have a broad measure of daily changes in supply and demand. Technicians often smooth the data using moving averages of the changes in advancing issues and declining issues in order to get a more accurate picture of changing trends in supply and demand. One of the best known indicators derived from smoothing out the advance/decline data is called the McClellan Oscillator.