Advance/Decline Line (A/D)

The advance/decline (A/D) line is a market breadth indicator that tracks the cumulative difference between the number of advancing and declining stocks. It shows how many stocks are participating in a market move and is commonly used to confirm trends or identify potential reversals through divergence.

Key takeaways

• The A/D line is a breadth indicator that measures participation across stocks, not price magnitude.
• When indexes rise and the A/D line also rises, the rally is broadly supported; if the index rises but the A/D line falls (bearish divergence), breadth is weakening and a reversal may be likely.
• Conversely, if indexes fall and the A/D line rises (bullish divergence), selling pressure may be easing.
• The A/D line gives equal weight to each stock and is cumulative, so past values affect current readings.

Formula

A/D_today = A/D_yesterday + (Advances_today − Declines_today)

For the first observation:
A/D_first = Advances_first − Declines_first

Where:
* Advances_today = number of stocks finishing higher today
Declines_today = number of stocks finishing lower today
A/D_yesterday = prior A/D value (zero or the first-day net if starting a series)

How to calculate (step-by-step)

1. Count the number of advancing and declining stocks for the day.
2. Compute Net Advances = Advances − Declines.
3. If this is the first calculation, A/D = Net Advances. Otherwise add Net Advances to the previous day’s A/D value.
4. Repeat daily to maintain the cumulative series.

What the A/D line tells you

• Trend confirmation: A rising A/D line alongside an advancing index confirms broad market strength; a falling A/D line alongside a declining index confirms weakness.
• Divergence signals:
• Bearish divergence: index rising while A/D falls → fewer stocks are participating; the rally may be near its end.
• Bullish divergence: index falling while A/D rises → selling may be losing momentum; a bottom could be forming.
• Breadth emphasis: the indicator highlights participation across many stocks rather than the influence of large-cap movers.

A/D Line vs. Arms Index (TRIN)

• A/D line: a cumulative breadth measure showing the net number of advancing vs. declining issues over time (longer-term perspective).
• Arms Index (TRIN): a short-term ratio comparing advancing/declining issues to advancing/declining volume; more useful for intraday or short-term sentiment shifts.
  Both provide complementary information about market internals.

Limitations

• Delistings and survivorship bias: when stocks are delisted (common on NASDAQ), their past contributions remain in the cumulative series, which can distort long-term readings.
• Equal weighting vs. market-cap indexes: the A/D line treats every stock equally. Market-cap-weighted indexes can be driven by a few large or mega-cap stocks, so indexes may move independently of breadth.
• Not a standalone signal: like all indicators, the A/D line should be used with price analysis and other tools to confirm signals and manage risk.

Practical use

Use the A/D line to gauge the breadth behind rallies or declines and to watch for divergences that may precede trend changes. Combine it with volume, price patterns, and other breadth measures (e.g., TRIN, new highs/new lows) for a more complete view of market internals.