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The Advance/Decline Line
("A/D Line") is undoubtedly the most widely used measure of
market breadth. It is a cumulative total of the Advancing-Declining
Issues indicator. When compared to the movement of a market index
(e.g., Dow Jones Industrials, S&P 500, etc) the A/D Line has proven
to be an effective gauge of the stock market's strength.
Many investors feel that
the A/D Line shows market strength better than more commonly used
indices such as the Dow Jones Industrial Average ("DJIA") or the S&P
500 Index. By studying the trend of the A/D Line you can see if the
market is in a rising or falling trend, if the trend is still
intact, and how long the current trend has prevailed.
Another way to use the A/D
Line is to look for a divergence between the DJIA (or a similar
index) and the A/D Line. Often, an end to a bull market can be
forecast when the A/D Line begins to round over while the DJIA is
still trying to make new highs. Historically, when a divergence
develops between the DJIA and the A/D Line, the DJIA has corrected
and gone the direction of the A/D Line.
A military analogy is often
used when discussing the relationship between the A/D Line and the
DJIA. The analogy is that trouble looms when the generals lead
(e.g., the DJIA is making new highs) and the troops refuse to follow
(e.g., the A/D Line fails to make new highs).
Both the Arms Index
and Open Arms Index are market indicators that show the
relationship between the number of stocks that increase or decrease
in price (advancing/declining issues) and the volume associated with
stocks that increase or decrease in price (advancing/declining
volume).
Both indicators are
primarily a short-term trading tool, showing whether volume is
flowing into advancing or declining stocks. If more volume is
associated with advancing stocks than declining stocks, the indexes
will be less than 1.0; if more volume is associated with declining
stocks, the Index will be greater than 1.0.
Both Indexes are usually
smoothed with a moving average. The method of smoothing determines
whether the indicator is called simply an Arms Index or an Open Arms
Index. The former is a simple moving average of the one day
calculation. The latter averages the numerator and denominator first
before the final calculation. TRIN is a one day Arms Index (not
averaged). |
