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June 16, 2011

Market Internals 003 – Advance Decline Line

The ‘Queen’

The Advance/Decline Line or ‘A/D Line’ for short, is the second most important of the internals. This indicator tells us the net sum of advancing stocks minus declining stocks.

The A/D Line is expressed: # of Advancing Stocks – # of Declining Stocks

There are roughly 3000 stocks listed on the NYSE and 3000 on the NASDAQ. An A/D Line reading of 1,500+ is very bullish and a reading of over 2,000 is extremely bullish. On the flip-side readings of -1500 and below are very bearish and readings below -2,000 are extremely bearish.

These extreme readings are indicative of trending days where once the market continues to trend all the way into the close. We look to the A/D Line in conjunction with the Breadth Ratio to confirm these trend days.

For example:
A day with 2,500 advancing stocks and only 500 declining stocks would yield a net of +2,000 (an extremely bullish reading). It would take a large catalyst to shift the market direction with a reading this bullish.

If on the open you continue to see the A/D Line moving +500, +700, +900, this is a sign of market strength. If however, the market is moving higher, but the A/D Line is moving lower, a divergence has occurred and could be a sign of a market turn.

Here is a Video Tutorial on setting up the chart below.

Market Internals Box

Here is another way to setup your Market Internals chart. In the top left we have the Breadth Ratio, top right AD Line, botom left Tick, bottom right ES.

It’s important to look to the other market internals for confirmation as one indicator alone is not sufficient to confirm a move.

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About Tim Racette
Tim Racette is a day trader of 15+ years in the E-mini futures and swing trader of stocks. Mountain biker, lover of the outdoors, and explorer. Tim is an ASU Sun Devil and a Chicagoland Native now living in sunny Scottsdale, AZ.

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