ADVANCE-DECLINE LINE

Advance-Decline Line
The Advance-Decline Line is the most cited and least understood of all market indicators. The most commonly cited A-D Line is simply a running total of the daily advances minus declines for the NYSE; however, an A-D Line can be calculated for any market index for which daily advancing and declining issues are reported. The resulting A-D Line is a measure of "breadth", a common term applied to advance-decline indicators. The A-D Line is compared to its related market index to see if price and breadth are moving together.
Please note that the A-D Line cannot measure the amplitude of the advances and declines -- only the absolute number. Because of this we must be very careful about how we interpret it as a market indicator. For example, in a strong market a stock could move up 2 points in two days (A-D = +2), then consolidate and retrace part of the advance by declining 1/8 point for four days (A-D = -4). This is a normal, healthy, common sequence of events; yet, the net price change is +1 1/2 while the net A-D is -2, interpreted by some as indicating some kind of weakness. (The reverse can occur in a weak market.)
It is common for the market to make a new high that is not confirmed by a new high on the A-D Line. This so-called non-confirmation then becomes the focus of attention and accepted evidence for many that the market is about to enter a decline. More often than not no decline materializes. So, while breadth deterioration as expressed by the A-D Line commonly does accompany major tops, its presence alone is not adequate evidence to conclude that a decline may be at hand.
What we should look for in the A-D Line is confirmation of the current price trend -- are the majority of stocks advancing with rising prices and vice versa? Because the A-D Line cannot express the amount of price movement, it is unreasonable to expect it to always confirm new price highs, which is how it is usually, and incorrectly, interpreted. Negative divergences over large spans of time are extremely common, are usually meaningless, and should be ignored.
The most significant type of divergence is when price begins to diverge from the Advance-Decline Line. A price divergence is when, after trending together with the A-D Line, price begins to trend in a different direction from the A-D Line. This Advance-Decline Line research area contains some examples of price divergences.
DAILY NET ADVANCES-DECLINES
The display of daily Net Advances-Declines on the chart below highlights extreme (climactic) activity. When a large number of stocks are participating in a particular price move (up or down), we recognize that such high levels of participation are unsustainable and refer to it as a "climax".
There are two kinds of climaxes -- an initiation climax, which marks the beginning of a longer-term price move and an exhaustion climax, which marks the end of a price move. Both kinds of climax can be followed by some consolidation activity before the trend changes or continues.
Climactic indicator readings identify points at which the market is overbought or oversold, but they don't always mean that the trend is about to change directions.

INTRODUCTION TO TECHNICAL ANALYSIS

During the 2000-2003 Bear Market many investors endured devastating losses of 50% or more. The sad thing is that a significant amount of those losses could have been avoided simply by using the most basic technical analysis tools. And we're not talking rocket science here. These are tools that appeal to common sense, and that anyone can use.
As investors we want to align ourselves with the trend of the market. At the most basic level, if the trend is up, we can own equities, and, if the trend is down, we should move to cash. That's certainly simple enough, but how do we determine the trend? If you are new to technical analysis, here's your first lesson. It's free, and you can use it to help you avoid trouble in the market for the rest of your life.
The following chart is a monthly line chart of the S&P 500 Index shown with a 6-month and a 10-month moving average. We determine the trend based upon the relationship of the 6-month line to the 10-month line. If the 6 is above the 10, the trend is rising (bullish). If it is below, the trend is falling (bearish).
You can see on the chart that there were only three moving average crossovers during the ten-year period shown. There was one in 1994, when the trend turned bullish, another in 2000, when the trend turned bearish, and, finally, the last in 2003, when the trend turned bullish again.
It is not always this clean and effective, but this simple analysis technique could have helped investors avoid many of the major down turns since 1929. Shouldn't everyone be using it? Remember, we can't see into the future, but we can see which way the wind is blowing and align ourselves with it. Technical analysis is a windsock, not a crystal ball, although, some of our tools can help us prepare for changes in direction.
This chart is finalized only once a month, and it provides a long-term view of the market. When we use weekly and daily based charts, we can get the same kind of insights, but in a shorter time frame. To learn more about these and other kinds of technical tools, read the next chapter in our free Learning Center course.
SHIV SHANKAR YADAV