Section 10:
Advance/Decline Line
The advance/decline line is a market breadth indicator that simply measures the number of stocks advancing and the number of stocks declining. The indicator is calculated by subtracting the number of declining stocks from advancing stocks.
The indicator is positive, or above zero, if more stocks advance than decline. The indicator is negative, or below zero, if more stocks decline than advance.
The advance/decline line is extremely volatile from one day to the next. It can swing from +2000 to -2000 in a matter of days. To smooth these wild swings, we apply a 50 day simple moving average to the advance/decline line. The 50 day moving average used on the advance/decline line is an intermediate-term look at the story behind the numbers. It’s in between the long-term story told by the 200 day moving average in the broad market trend and the short-term story told by the 20 day moving average in the new high/new low index.
Like the new high/new low index, the universe of stocks that we follow with the advance/decline line is the NYSE Composite.
Advance/Decline Line Scoring
The advance/decline line gets a score of +1 if the 50 day simple moving average is greater than zero. (See Figure 10.11)
Figure 10.11
The advance/decline line gets a score of 0 if the 50 day simple moving average is less than zero. (See Figure 10.12)
Figure 10.12