The advance decline line (A/D) is a popular market breadth indicator used in technical analysis. The A/D line is used for showing the strength of a current trend and is also useful for spotting divergences.
The A/D line is traditionally applied to an index of stocks (such as the S&P 500) and shows how many stocks and rising and falling over time. You can, however, also apply the A/D line to individual securities for the same insights on performance.
Calculating the A/D line is easy. Simply subtract the number of declining stocks from the number of advancing stocks. The line is then culminated from these differences as a standalone series that shows the net advances.
An example of the A/D line for the S&P500 is provided below.
How to use the Advance Decline Line?
The advance decline line can be used to visualize and affirm an index’s current price trend as well as spot potential reversals and divergences.
In general, the A/D line should move in step with price, as it’s calculated by the rise and fall of prices over a given period of time. Seeing that the A/D line is moving with the trend is a positive signal that the trend could continue.
Divergences occur when the A/D line shows a different reading than what could be expected from the price action. For instance, the price could continue to make higher gains while the A/D line trends lower. This is an example of a bearish divergence.
A bullish divergence could occur when prices make a lower low but the A/D line makes a higher low. This would be positive news for speculators as it’s an indication that prices could soon return to the upside.
Although effective as a market breadth indicator, the A/D line should be used in conjunction with other indicators for a complete technical overview. Some popular combinations include the MACD, pivot points, or the Bollinger Bands.