Advance Decline Line’s Message
The Advance-Decline has proven itself over the years and as such is an important tool when assessing the health of a market. Like all indicators, its never always correct and why it should be used in a weight-of-the-evidence approach.
The Advance-Decline Line (AD Line) is a breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks. Net Advances is positive when advances exceed declines and negative when declines exceed advances. The AD Line is a cumulative measure of Net Advances. It rises when Net Advances is positive and falls when Net Advances is negative. When comparing the AD Line against the index, the AD Line should confirm an advance or a decline with similar movements. Divergences in the AD Line vs index can signal a potential reversal and worthy of an investor’s attention.
Taking a look at the AD line in 2015 during what we now know turned out to be just a (~19%) correction in a bull uptrend instead of a change in trend, the AD line in the upper pane was still rising, while the stock index in the lower pane was declining. This is an excellent example of bullish divergence …. we all know what happened after the fact (the resumption of the bull market).
As always, price never goes straight up and we should expect the normal market ebb and flow based upon investors whims especially now as we are so overbought, but any shallow pullback will be viewed as a opportunity to put risk capital back to work, if not already complete.