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 Advance
Decline Charts
Advancing Declining Issues, Volume, A-D
Line, A/D Ratio, New Highs, New Lows |
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The term “declines” represents a cumulative (i.e., running) total of the number of stocks (issues) that have fallen in price compared to their close on the previous trading day. In other words, if the price of a particular stock is currently trading below its closing price from the previous trading day, this stock is considered part of the day’s “declines” group. Conversely, the term “advances” refers to a cumulative (i.e., running) total of the number of stocks that have risen in price compared to their close on the previous trading day. If the price of a particular stock currently trades above its closing price from the previous trading day, this stock is considered part of the day’s “advances” group. “Advances” and “declines” are also called “advancing issues” and “declining issues”, respectively. Advances and declines are used as a measure (indicator) of market strength or weakness. Thus, in a rising market, you will generally see more advances, whereas in a falling market, you will usually find more declining issues. We can chart the number of advances versus the number of declines, for example on daily charts (where one bar represents 1 day), so that you can readily determine how many stocks in an index closed up and how many closed down. Armed with this data, you can assess how strong the current trend really is by looking not only at the number of advancing and declining issues, but also at the total volume associated with the advances and declines. For instance, suppose that on a particular day, five stocks of the Jones Industrials index (DJI) closed down while 25 stocks closed up. You would presumably think that the DJI index was strongly bullish that day. However, if you analyzed the volume data associated with the advances and declines, and then found that the advances volume was 800,000 shares while the declines volume amounted to 750,000 shares, you could make the determination from these numbers that the “bullish trend” might not be as strong as you first believed. On the other hand, using the same example, say that the advances volume was 1,300,000 shares but the declines volume only 200,000 shares. In this case, you could infer that because the bulk of the volume activity was concentrated in stocks that belonged to the advances group, this particular trend was much “healthier”. While we can perform this type of analysis using daily charts, intraday charts are much better suited for this purpose. Intraday charts provide more detail and allow you to monitor actual changes in the number (and volume) of declining and advancing issues - in real-time. This gives you an instant snapshot of any changes in the market sentiment, exactly as they unfold. In the chart below, you can see the advances (green line) and declines (red line) for the S&P 500 index between July 21 and 27, 2004. Notice that during the market decline (from July 21 to 26, 2004), the number of declining issues consistently surpassed the number of advancing issues. This was even the case on July 22, despite that fact that the index closed up that day. It was only on July 27 that the number on advances outweighed the number of declines. Chart 1. S&P 500 5-day intraday (one bar = 15 min)
In technical analysis, advances and declines data are used to assess “market breadth”. Looking at the chart above, a technical analyst might say that the market had “negative breadth” from July 21-26, but that the breadth turned positive on July 27. Two other commonly used indicators that are based on the advances and declines concept are:
The principles discussed above can be applied not only to the actual number of advancing and declining issues, but also to their respective volume (“advancing volume” and “declining volume”). By applying the above indicators to volume data, as opposed to simply to the number of stocks moving up or down, we can get a better feel for the prevailing market sentiment, because we can uncover those areas where the biggest trading activity is taking place. Having access to advancing and declining volume data will thus reveal where the majority of traders are focusing their activities - on declining or on advancing stocks.
A. v. S. Copyright 2004 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed. |
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