The Advance/Decline Line ("A/D Line") is undoubtedly the most
widely used measure of market breadth. It is a cumulative total of the
Advancing-Declining Issues indicator. When compared to the movement of a
market index (e.g., Dow Jones Industrials, S&P 500, etc) the A/D Line
has proven to be an effective gauge of the stock market's strength.
The A/D Line is helpful when measuring overall market strength.
When more stocks are advancing than declining, the A/D Line moves up
(and vice versa).
Many investors feel that the A/D Line shows market strength better than
more commonly used indices such as the Dow Jones Industrial Average ("DJIA")
or the S&P 500 Index. By studying the trend of the A/D Line you can see
if the market is in a rising or falling trend, if the trend is still
intact, and how long the current trend has prevailed.
Another way to use the A/D Line is to look for a divergence between the
DJIA (or a similar index) and the A/D Line. Often, an end to a bull
market can be forecast when the A/D Line begins to round over while the
DJIA is still trying to make new highs. Historically, when a divergence
develops between the DJIA and the A/D Line, the DJIA has corrected and
gone the direction of the A/D Line.
A military analogy is often used when discussing the relationship
between the A/D Line and the DJIA. The analogy is that trouble looms
when the generals lead (e.g., the DJIA is making new highs) and the
troops refuse to follow (e.g., the A/D Line fails to make new highs).