Leavitt Brothers: Forget the Fundamentals

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Advance/Decline Line

The Advance/Decline Line (A/D Line) is a widely followed “breadth” indicator used to measure the market's internal strength. It is the cumulative total of the difference between the number of NYSE issues that are advancing versus those declining.

When the A/D Line is moving up the market is said to have good breadth while a downward sloping line indicates internal weakness.

The A/D Line can be used to confirm the movement in the overall market or to hint at a possible reversal. If both the market and the A/D line are moving up, one can expect the market strength to continue. But if the market moves up while the A/D starts to flatten out and then move down, it hints at internal weakness, and the overall market is very likely to pull back.

On the downside, if both the market and the A/D Line are moving down, one can expect the market weakness to continue. But if the market moves down while the A/D Line starts to flatten out and then move up, internally the market is gaining some strength and the indexes will likely bottom and reverse course.

The A/D Line is a long term indicator. The next two chart show an example of a positive divergence that formed between the NYSE and the NYSE A/D Line. While the market was making a series of lower highs during the last half of 2002 and beginning months of 2003, the A/D Line had bottomed and started turning. Strength was building, and the NYSE rally was not far off.

The next two chart show the opposite situation. While the market was steadyily moving up, the A/D Line was making lower highs. Something had to give. Either the market was going to pull back or the A/D Line was going to start moving up. In this case the A/D Line broke support and the NYSE wasn't far behind.

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