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A/D Line = (Advancing Stocks - Declining Stocks) + Previous Period's A/D Line Value

Similarly, the Advance Decline Volume Line is calculated as the running total of the advance volume minus the decline volume:

A/D Volume Line = (Adv. Volume - Dec. Volume) + Previous Period's A/D Vol. Line Value

In technical analysis this indicator is used by many traders to confirm the strength of a current trend and the possibility of it reversing. It moves lower when there are more declining issues than advancing issues and moves up when there are more advancing issues. This concept allows you to spot changes in supply and demand. In order to get a more accurate picture of changing trends in supply/demand balance, technicians smooth the data by applying moving averages to the AD Line.

If, during the up-trend, the AD line starts to slope downwards, this could be a sign that the markets are losing their breadth - that a majority of the traders have begun to focus on declining stocks that may be getting ready to head in the other direction (up). Similarly, if during a down-trend, the AD Line begins to move upward, it could be an indication of a change in mood from bearish to bullish - that a majority of traders are switching from trading declining stocks to trading advancing stocks. If the slope of the A/D line is up and the market is trending upward, the market is said to be healthy.

If the Advance Decline Line moves with the trend (upward during the up markets and downward during the down markets), technical analysis states that the advance decline line confirms the current trend.

Below you see the S&P 500 advance decline line and the advance decline volume line.

Chart 1: S&P 500 index - Advance Decline Line.

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